Ifrs15 Revenue Handbook PDF

Revenue
IFRS 15 handbook
®
June 2019
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Contents
Facing new challenges 1 7.3 Amortisation 187
Overview 2 7.4 Impairment 192
1 Step 1 – Identify the contract with a customer 3 8 Contract modifications 194

1.1 Criteria to determine whether a contract 8.1 Identifying a contract modification 194
exists 3 8.2 Accounting for a contract modification 198
1.2 Contract term 14 9 Licensing 206
1.3 Consideration received before a contract 9.1 Licences of intellectual property 207
exists 17 9.2 Determining whether a licence is distinct 209
1.4 Combination of contracts 19 9.3 Determining the nature of a distinct licence 214
2 Step 2 – Identify the performance obligations 9.4 Timing and pattern of revenue recognition 220
in the contract 23 9.5 Contractual restrictions and attributes of
2.1 Distinct goods or services 24 licences 223
2.2 Implied promises and administrative tasks 35 9.6 Sales- or usage-based royalties 225
2.3 Series of distinct goods or services 39 10 Other application issues 234
3 Step 3 – Determine the transaction price 46 10.1 Sale with a right of return 234
3.1 Variable consideration (and the constraint) 47 10.2 Warranties 239
3.2 Significant financing component 63 10.3 Principal vs agent considerations 244
3.3 Non-cash consideration 78 10.4 Customer options for additional goods
3.4 Consideration payable to a customer 81 or services 263
3.5 Sales taxes 88 10.5 Customers’ unexercised rights (breakage) 285
10.6 Non-refundable up-front fees 289
4 Step 4 – Allocate the transaction price to the 10.7 Sales outside ordinary activities 295
performance obligations in the contract 90
4.1 Determine stand-alone selling prices 91 11 Presentation 299
4.2 Allocate the transaction price 98 11.1 Statement of financial position 299
4.3 Changes in the transaction price 111 11.2 Statements of profit or loss and cash flows 312
5 Step 5 – Recognise revenue when or as the 12 Disclosure 316

entity satisfies a performance obligation 113 12.1 Annual disclosure 316
5.1 Transfer of control 114 12.2 Interim disclosures 325
5.2 Performance obligations satisfied over time 115 13 Effective date and transition 326
5.3 Measuring progress towards complete 13.1 Transition 326
satisfaction of a performance obligation 131 13.2 Retrospective method 328
5.4 Performance obligations satisfied at a point 13.3 Cumulative effect method 337
in time 148 13.4 Consequential amendments to other IFRS
5.5 Repurchase agreements 151 requirements 341
5.6 Consignment arrangements 156 13.5 First-time adoption 342
5.7 Bill-and-hold arrangements 159 Guidance referenced 344
5.8 Customer acceptance 161
Detailed contents 345
6 Scope 162
6.1 In scope 162 Index of examples 348
6.2 Out of scope 163 Index of KPMG insights 355
6.3 Partially in scope 165 About this publication 363
6.4 Portfolio approach 171
Keeping in touch 364
7 Contract costs 173
7.1 Costs of obtaining a contract 173 Acknowledgments 366
7.2 Costs of fulfilling a contract 179
Facing new challenges
Reporting revenue under IFRS 15 is now one of the ordinary activities of companies
in the 100+ countries that use IFRS Standards. So this feels like the right time to
take stock – to pull together, in one place, what we have learned about this new
world of revenue recognition.
Over the past five years, we – like you – have wrestled with the many challenges of
implementing IFRS 15. In doing so, we have gained extensive insight and hands-
on experience across different industries and geographies. And we are delighted
to share our experience with you in our IFRS 15 handbook: Revenue. It provides
detailed guidance, illustrative examples and extensive discussion of the areas that
companies have found most complex.
Looking forward, as your business grows and evolves – whether by developing
new products and services, embedding technological innovations or buying new
businesses – we hope this handbook will be your go-to resource as you apply
IFRS 15 to new facts and circumstances.
Prabhakar Kalavacherla (PK)

Brian O’Donovan
Anne Schurbohm
Kim Heng
KPMG Global Revenue Recognition Leadership Team
© 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
2 | Revenue – IFRS 15 handbook
Overview
This handbook provides a detailed analysis of the revenue standard, IFRS 15
Revenue from Contracts with Customers, including insights and examples to help
entities to navigate the revenue recognition requirements. In many cases, further
analysis and interpretation may be needed for an entity to apply the requirements
to its own facts, circumstances and individual transactions. Furthermore, some
of our insights may change and new insights will be developed as issues from the
implementation of the revenue standard arise and as practice evolves.
Organisation of the text

The following diagram highlights the layout of the revenue standard and the
corresponding sections in this handbook. Each section provides an overview,
the requirements of the standard, examples illustrating basic scenarios and our
insights. Some sections also have additional application examples illustrating more
complex scenarios or sector-specific issues.
5-step model
(1) (2) (3) (4) (5)

Step 1 – Step 2 – Step 3 – Step 4 – Step 5 –
Identify the Identify Determine Allocate the Recognise
contract performance the transaction transaction revenue
obligations price price
(6)
Scope
Other recognition and measurement guidance
(7) (8) (9) (10)

Contract Contract Licensing Other application
costs modifications issues
Presentation and implementation
(11) (12) (13)

Presentation Disclosure Effective date
and transition
1 Step 1 – Identify the contract with a customer | 3
1.1 Criteria to determine whether a contract exists |
1 Step 1 – Identify
the contract with a
customer
Overview
A contract with a customer is in the scope of the standard when the contract is
legally enforceable and certain criteria are met. If the criteria are not met, then
the contract does not exist for the purpose of applying the general model of
the standard, and any consideration received from the customer is generally
recognised as a deposit (liability). Contracts entered into at or near the same
time with the same customer (or a related party of the customer) are combined
and treated as a single contract when certain criteria are met.
1.1 Criteria to determine whether a contract exists

IFRS 15.10 The standard defines a ‘contract’ as an agreement between two or more parties
that creates enforceable rights and obligations and specifies that enforceability is
a matter of law. Contracts can be written, oral or implied by an entity’s customary
business practices.
IFRS 15.12 A contract does not exist when each party has the unilateral right to terminate a
wholly unperformed contract without compensation.
IFRS 15.9 A contract with a customer is in the scope of the standard when it is legally
enforceable and meets all of the following criteria.
... collection of ... rights to goods

consideration is or services and
probable payment terms can
be identified
A contract
exists if...
... it is approved
and the parties are
... it has commercial committed to
substance their obligations
IFRS 15.9(e) In making the collectability assessment, an entity considers the customer’s ability
and intention (which includes assessing its credit-worthiness) to pay the amount of
consideration when it is due. This assessment is made after taking into account any
price concessions that the entity may offer to the customer (see Section 3.1).
IFRS 15.14 If the criteria are not initially met, then an entity continually reassesses the contract
against them and applies the requirements of the standard to the contract from the
date on which the criteria are met. Any consideration received for a contract that
does not meet the criteria is accounted for under the requirements in Section 1.3.
IFRS 15.13 If a contract meets all of the criteria at contract inception, then an entity does not
reassess the criteria unless there is an indication of a significant change in the facts
and circumstances. If on reassessment an entity determines that the criteria are no
longer met, then it ceases to apply the standard to the contract from that date, but
does not reverse any revenue previously recognised.
Example 1 – Assessing the existence of a contract: Sale of real

estate
In an agreement to sell real estate, Seller X assesses the existence of a

contract. In making this assessment, X considers factors such as:
– the buyer’s available financial resources;
– the buyer’s commitment to the contract, which may be determined based on
the importance of the property to the buyer’s operations;
– X’s prior experience with similar contracts and buyers under similar
circumstances;
– X’s intention to enforce its contractual rights;
– the payment terms of the arrangement; and
– whether X’s receivable is subject to future subordination.
If X concludes that it is not probable that it will collect the amount to which it
expects to be entitled, then a contract to transfer control of the real estate does
not exist. Instead, X applies the guidance on consideration received before
concluding that a contract exists (see Section 1.3), and initially accounts for any
cash collected as a deposit (liability).
Example 2 – Assessing the existence of a contract: No written sales

agreement
Shoe Manufacturer S holds products available to ship to customers before the

end of its current fiscal year. Shoe Shop T places an order for the product, and S
delivers the product before the end of its current fiscal year.
S generally enters into written sales agreements with this class of customer
that require the signatures of the authorised representatives of both parties. S
prepares a written sales agreement and its authorised representative signs the
agreement before the end of the year. T does not sign the agreement before the
end of S’s fiscal year. However, T’s purchasing department has orally agreed to
the purchase and stated that it is highly likely that the contract will be signed in
the first week of S’s next fiscal year.
After consulting its legal counsel and obtaining a legal opinion, S determines that
based on local laws and legal precedent in T’s jurisdiction, T is legally obliged to
pay for the products shipped to it under the agreement, even though T has not
yet signed the agreement.
Therefore, S concludes that a contract exists and applies the general
requirements of the standard to sales made under the agreement up to the
year end.
Example 3 – Collectability threshold: Assessment based on goods

or services to be transferred
Company C contracts with Customer D to sell 1,000 units for a fixed price of
1 million. D has a poor payment history and often seeks price adjustments after
receiving orders and so C assesses that it is probable that it will collect only
70% of the amounts due under the contract.
Based on its assessment of the facts and circumstances, C expects to
provide an implicit price concession and accept 70% of the fixed price from
D. When assessing whether collectability is probable, C assesses whether it
expects to receive 700,000, which is the amount after the expected implicit
price concession.
On subsequent reassessment, if C expects to collect more than 700,000,
then it recognises the excess as revenue. If C subsequently assesses that it
will collect less than 700,000, then C recognises the shortfall as a bad debt
expense, which is measured using the guidance on impairment of receivables.
However, if C determined that it had granted an additional price concession,
then the shortfall would be a reduction in transaction price and revenue.
Assessment focuses on enforceability, not form of the contract
IFRS 15.BC32 The assessment of whether a contract exists for the purpose of applying the
standard focuses on the enforceability of rights and obligations based on
the relevant laws, legal precedent and regulations, rather than the form of
the contract (oral, implied or written). This may require significant judgement
in some jurisdictions or for some arrangements, and may result in different
assessments for similar contracts in different jurisdictions. In cases of
significant uncertainty about enforceability, a written contract and legal
interpretation by qualified counsel may be required to support a conclusion
that the parties to the contract have approved and are committed to performing
under the contract.
However, although the contract has to create enforceable rights and obligations,
some of the promises in the contract to deliver a good or service to the
customer may be considered performance obligations even though they are not
legally enforceable (see Chapter 2).
Collectability is only a gating question
IFRS 15.9 Under the revenue standard, the collectability criterion is included as a gating
question designed to prevent entities from applying the revenue model to
problematic contracts and recognising revenue and a large impairment loss at
the same time. The collectability criteria are likely to be met for many routine
customer contracts.
Collectability is assessed based on the amount that the entity

expects to receive in exchange for goods or services
The collectability threshold is applied to the amount to which the entity expects
to be entitled in exchange for the goods and services that will be transferred
to the customer, which may not be the stated contract price. The assessment
considers:
– the entity’s legal rights;
– past practice;
– how the entity intends to manage its exposure to credit risk throughout the
contract; and
– the customer’s ability and intention to pay.
The collectability assessment is limited to the consideration attributable to the
goods or services to be transferred to the customer for the non-cancellable
term of the contract. For example, if a contract has a two-year term but either
party can terminate it after one year without penalty, then an entity assesses
the collectability of the consideration promised in the first year of the contract
(i.e. the non-cancellable term of the contract).
Judgement is required to differentiate between a collectability

issue and a price concession
IFRS 15.52, IE7–IE13, BC45 Judgement is required in evaluating whether the likelihood that an entity will
not receive the full amount of stated consideration in a contract gives rise to a
collectability issue or a price concession.
The standard includes two examples of implicit price concessions: a life
science prescription drug sale (Example 2 in the standard) and a transaction to
provide health care services to an uninsured (self-pay) patient (Example 3 in
the standard). In both examples, the entity concludes that the transaction price
is not the stated price or standard rate and that the promised consideration is
variable. Consequently, an entity may need to determine the transaction price
in Step 3 of the model (see Chapter 3), including any price concessions, before
concluding on the collectability criterion in Step 1 of the model.
Collectability threshold may be assessed using information

derived at the portfolio level
IFRS 15.4 In some situations, an entity may use a portfolio of historical data to estimate
the amounts that it expects to collect. This type of analysis may be appropriate
when an entity has a high volume of homogeneous transactions. These
estimates are then used as an input into the overall assessment of collectability
for a specific contract.
For example, if on average a vendor collects 60 percent of amounts billed for
a homogeneous class of customer transactions and does not intend to offer
a price concession, then this may be an indicator that collection of the full
contract amount for a contract with a customer within that class is not probable.
Therefore, the criterion requiring collection of the consideration under the
contract to be probable may not be met.
Conversely, if on average a vendor collects 90 percent of amounts billed for
a homogeneous class of contracts with customers, then this may indicate
that collection of the full contract amount for a contract with a customer
within that class is probable. Therefore, the criterion requiring collection of
the consideration under the contract to be probable may be met. However,
if the average collections were 90 percent because the vendor generally
collected only 90 percent from each individual contract, then this may indicate
that the vendor has granted a 10 percent price concession to its customer.
For a discussion of the differentiation between a collectability issue and a
price concession, see the previous box.
Collectability is reassessed only when there is a significant

deterioration in the customer’s credit-worthiness
An entity does not reassess the Step 1 collectability criteria unless there is
a significant change in facts and circumstances that results in a significant
deterioration in the customer’s credit-worthiness. For example, a significant
deterioration in a customer’s ability to pay because it loses one of its
customers that accounts for 75 percent of its annual sales would be likely to
lead to a reassessment.
The determination of whether there is a significant deterioration in the
customer’s credit-worthiness will be situation-specific and will often be a matter
of judgement. The evaluation is not intended to capture changes of a more
minor nature – that is, those that do not call into question the validity of the
contract. Nor does it capture changing circumstances that might reasonably
fluctuate during the contract term (especially for a long-term contract) that do
not have a significant effect.
If the entity determines that collectability is no longer probable, then it
discontinues revenue accounting and follows the guidance on accounting for
consideration received when a contract does not exist – see Section 1.3.
Collectability assessment required for contracts with a significant

financing component
The assessment of collectability in Step 1 of the model applies equally to

contracts with or without a significant financing component. This is regardless
of the fact that credit-worthiness is factored into the discount rate and therefore
the transaction price for a contract with a significant financing component.
Fiscal funding clauses may affect the assessment of whether a

contract exists
When the customer in a contract is a government, there may be a fiscal funding

clause stating that the contract is cancellable if the funding authority does not
appropriate the funds necessary for the government to pay. Judgement will
need to be applied to determine whether a contract exists when delivery of
goods or services commences before funding has been formally approved.
Enforceable rights and obligations for an expired contract when

the entity continues to provide services
In some cases, an entity may continue to deliver services to a customer under

the terms of a contract after it has expired – e.g. when the terms of a new
contract to replace the existing one are not finalised before the expiry date of
the existing contract. If the entity has legally enforceable rights and obligations
related to these services, then the services delivered are accounted for using
the general guidance of the standard. Conversely, if the entity does not have
legally enforceable rights and obligations for the services delivered after the
contract expires, then it applies the guidance on accounting for consideration
received before a contract exists – see Section 1.3.
Making the assessment of whether enforceable rights and obligations exist will
often be complex and may require an entity to seek legal advice to determine
whether it has enforceable rights and obligations after the expiry date of
the contract.
Free trial period offers
In some cases, an entity will offer customers the right to obtain its services
for free for a period, during which time the customer can decide to contract
for future services. For example, a customer can decide to obtain a 12-month
subscription to a film streaming service after the end of a free trial period.
Service providers may offer additional incentives – e.g. free or discounted
services or a discounted price on the service – if the customer enters into a
long-term contract.
In these cases, no contract exists until the customer accepts the entity’s offer to
provide services after the free trial period because the customer can opt out any
time during the free trial period. No enforceable right to consideration exists for
the entity until the customer contracts for post-free trial period services. Once
the customer accepts the entity’s offer, the entity accounts for the remaining
free trial period services (from the date a contract exists) and the post-free trial
services as performance obligations of the contract.
Services provided during the free trial period, before the customer accepts
the entity’s offer to provide services beyond the free trial period, are generally
accounted for as sales incentives.
However, it may be reasonable to account for only the post-free trial period
goods or services as performance obligations of the customer contract if either:
– the customer’s right to the remaining free trial period goods or services is not
enforceable; or
– on a portfolio basis, accounting for only the post-free trial period goods
or services as performance obligations would not differ materially from
accounting for both the remaining free trial period goods or services and the
post-free trial period goods or services as performance obligations of the
contract with the customer.
Success-based fee arrangements
IFRS 15.9 In some cases, an entity may be entitled to consideration for services
performed only if a specific outcome is achieved and the customer can
withdraw from the contract at any time before that event without compensating
the entity. These arrangements are often referred to as ‘success-based fee
arrangements’. They are common in the services industry – e.g. real estate
agents and travel agents. It appears that these arrangements, in which the
entire amount of the promised consideration is contingent on the achievement
of a specific outcome, are not contracts with a customer in the scope of the
revenue standard before the specific outcome is achieved. This is because, in
these arrangements, the entity does not have enforceable rights to payment
for the services that it has performed to date and, similarly, the customer has
no obligations. For example, a property holder enters into a contract with a
real estate agent to sell their property. Under the contract terms, the property
holder can cancel the contract at any time without penalty and is obliged to pay
the real estate agent only if a sale of the property is completed. In this case, a
contract with a customer arises only when sale of the property is completed,
because before this point the real estate agent does not have an enforceable
right to payment, nor does the property holder have an obligation to pay and, as
such, the agreement does not meet all of the contract existence criteria.
Contracting practices may need to be evaluated by customer

class
Contracting practices with different classes of customers in the same

jurisdiction may need to be evaluated. For example, an entity may have a
business practice of using written contracts. However, the entity may enter into
arrangements with certain customers whose business practices of providing
evidence of an arrangement differ from the entity’s own practice.
If an entity establishes a different practice for evidencing an arrangement for
specific customers, including implied contracts for various classes of customers
(e.g. by customer type, geographic region, product type or sales price range),
then it may need to consult legal counsel to determine whether these practices
affect the determination of whether the arrangement is legally enforceable.
It may be advisable for an entity to document its conclusions about its
evaluation of legal enforceability for each arrangement. Depending on
the circumstances, it may also be appropriate for an entity to develop
documentation for a particular customer or class of customer, or by jurisdiction.
Two definitions of a contract exist in IFRS
IAS®32.13 The definition of a contract in the revenue standard focuses on legal

enforceability. Although the term ‘contract’ is also defined in the standard on
presentation of financial instruments, that definition is different and stops short
of requiring the contract to be legally enforceable.
The International Accounting Standards Board (the Board) did not amend the
definition of a contract in the standard on presentation of financial instruments
on the grounds that this may have unintended consequences on the accounting
for financial instruments. As a result, there are two definitions of a contract
in IFRS.
1.1.1 Framework agreements

Generally, a framework agreement that includes no minimum purchase quantities
only establishes the terms under which orders to purchase goods or services may
be placed, rather than creating enforceable rights and obligations for the parties –
i.e. it does not create a contract. However, enforceability is a matter of law in the
relevant jurisdiction and each framework agreement will need to be evaluated based
on its terms and conditions and local law.
When a framework agreement on its own does not create enforceable rights
and obligations, it will normally be the purchase order in combination with the
framework agreement that creates the enforceable rights and obligations between
the entity and the customer. Therefore, the purchase order in combination with
the framework agreement will be evaluated to determine whether the criteria in
paragraph 9 of the standard are met and a contract exists.
An entity needs to consider whether the pricing of individual purchase orders is

inter-related and:
– the purchase orders need to be combined (see Section 1.4); or
– there are implicit or explicit promises in the framework agreement: i.e. whether
it includes a material right (see Section 10.4) or any variable consideration
(see Section 3.1) – e.g. a rebate or discount.
Example 4 – Framework agreement: No specified minimum

purchases
Manufacturer X enters into a framework agreement with Customer Z for the

sale of widgets. The agreement sets out the general terms including pricing,
warranty, return rights and ordering protocols. It does not include any minimum
purchase requirements.
In this example, X determines that the framework agreement does not give
rise to a contract because it does not create enforceable rights and obligations.
Further, it determines that a contract exists for goods only once they are
delivered because purchase orders are cancellable at any time before this point.
Example 5 – Framework agreement: Specified minimum purchases
Manufacturer X enters into a framework agreement with Customer Z for the

sale of widgets. The agreement sets out the general terms including pricing,
warranty, return rights and ordering protocols. In addition, it specifies that X will
deliver 1,000 units on the first day of each month for one year.
X determines that the framework agreement gives rise to a contract because
it creates enforceable rights and obligations with respect to 1,000 units to be
delivered on the first day of each month.
Minimum purchase requirements
IFRS 15.9, 12 Some framework agreements may include a requirement for the customer to
purchase a minimum quantity of goods or services. Such a requirement may
be a cumulative minimum for the agreement period or for periods within the
framework agreement – e.g. each year of a multi-year framework agreement.
If the minimum is enforceable, then the framework agreement itself may
constitute a contract. However, if the entity’s past practice of not enforcing the
minimum in the framework agreement results in a conclusion that, based on all
of the facts and circumstances, the minimum is not legally enforceable, then
the framework agreement would not be a contract.
In addition, if relevant experience with the customer suggests that the
customer will not meet the required minimum and that the entity will not seek
to enforce it, then this would typically demonstrate in the case of a framework
agreement that the entity and the customer are not committed to the minimum
in the framework agreement. Consequently, even if the minimum is legally
enforceable, the contract may not meet all of the contract existence criteria, in
which case it would not be a contract.
Additional steps may be required to create legally enforceable

rights and obligations
Generally, the purchase order in combination with the framework agreement

will be evaluated to determine whether the Step 1 criteria are met and a
contract exists. However, if additional steps must be taken for the purchase
order to create legally enforceable rights and obligations (e.g. executing a
supplemental contract or addendum to the framework agreement subsequent
to receipt of the purchase order), then a contract with a customer will not exist
until those steps are completed.
Purchase orders under the same framework agreement may be

inter-related
IFRS 15.BC73 In some cases, pricing among the purchase orders may be inter-related.
Purchase orders that are issued separately should be evaluated to determine
whether they affect other purchase orders under the same framework
agreement. When purchase orders are inter-related, this may result in the
transaction price for an individual purchase being different from the stated
contract price. This may occur for a number of reasons. In some cases,
purchase orders may meet the criteria for combining contracts, whereas in
other cases the entity will need to consider whether purchase orders give
rise to implicit or explicit promises that represent a material right in Step 2 or
variable consideration in Step 3 (e.g. rebate or discount arrangements).
Additional application examples
Example 6 – Automotive: Combining nomination letter with

subsequent purchase orders
On 1 January, Carmaker F approves Automotive Supplier S’s offer to

manufacture a specialised part for its cars. F’s nomination letter confirms
that the price of the units ordered in February and March will be 80 and 100
respectively. F expects to order 50,000 units in each of February and March. To
place an order, F will submit a purchase order to S.
S notes that neither the nomination letter nor the framework agreement
contains minimum quantities for F to purchase. It concludes that the nomination
letter and the framework agreement, on their own, do not create enforceable
rights and obligations and, therefore, a contract does not exist under the
revenue standard.
S identifies each purchase order as a contract under the standard. This
is because S can identify the payment terms and F’s right to goods from
the purchase orders together with the framework agreement and the
nomination letter.
Example 7 – Automotive supplier: Contract exists for engineering

services but not for supply of parts
On 1 January, Carmaker G approves Automotive Supplier S’s offer to

manufacture a specialised part for its cars. G and S agree that S will also
perform engineering and design (E&D) activities on behalf of G, necessary for
the production of the part. S concludes that these pre-production activities
transfer a service to G. The framework agreement between G and S does not
specify a separate price for E&D services, but the price of each part includes
a mark-up to compensate S for the E&D services. The framework agreement
does not state a minimum quantity of parts to be ordered by G.
The agreement also contains a termination clause under which S will be
reimbursed for any costs incurred for the E&D services if G terminates the
agreement.
On 1 April, S completes the E&D activities.

On 1 December, G orders the first batch of parts.
S concludes that on 1 January no enforceable rights and obligations arise in
relation to the parts, because the agreement does not establish minimum
quantities of parts to be purchased. However, because the termination clause
in the agreement guarantees compensation for the E&D activities, a contract
exists for the E&D services under the revenue standard.
1.2 Contract term

IFRS 15.11 The standard is applied to the duration of the contract (i.e. the contractual period) in
which the parties to the contract have presently enforceable rights and obligations.
IFRS 15.12 A contract does not exist if each party to the contract has the unilateral enforceable
right to terminate a wholly unperformed contract without compensating the other
party (or parties).
A contract is ‘wholly unperformed’ if both of the following criteria are met:

– the entity has not yet transferred any promised goods or services to the
customer; and
– the entity has not yet received, and is not yet entitled to receive, any
consideration in exchange for promised goods or services.
It appears that an economic incentive to renew a contract is not relevant when

evaluating the term of the contract because it does not give rise to enforceable
rights or obligations.
1.2 Contract term |
Example 8 – Contract term: Economic incentives
Company X enters into a month-to-month wireless contract with Customer

Y that includes a handset and voice and data services. Y makes no up-front
payment for the handset, but will pay the stand-alone selling price of the
handset through monthly instalments over a 12-month period. If Y fails to renew
the monthly wireless contract, then the remaining balance for the handset
becomes due immediately.
In addition, Y pays a monthly service fee for the voice and data services, which
represents their stand-alone selling price. The contract does not include any
payments other than for the handset and the services.
In assessing the enforceability of the contract, X considers the amounts due if
Y decides not to renew at the end of Month 1. X observes that the requirement
to repay the remaining balance for the handset when the service contract is not
renewed is an economic incentive for Y to renew. We believe that this economic
incentive is not a substantive termination penalty, but instead is a repayment of
a loan for goods already transferred.
Because X cannot enforce the service contract for a period longer than
one month, X concludes that the contract term is one month.
Example 9 – Contract term: Cancellation without penalty after a

specified period
Contractor S enters into a manufacturing contract to produce 50 specialised

sensors for Customer C for a fixed price of 2,000 per sensor. C can cancel the
contract without a penalty after receiving 10 sensors.
S determines that because there is no substantive compensation amount
payable by C on termination of the contract – i.e. no termination penalty in the
contract – it is akin to a contract to produce 10 sensors that gives C an option to
purchase an additional 40 sensors.
Example 10 – Contract term: Cancellable without penalty
Company X contracts with Customer R to provide its service offering for a flat
fee of 130 per month, subject to annual increases based on the lesser of 2% or
changes in the consumer price index (CPI). The stand-alone selling price for this
service is 130. The contract term is indefinite and it is cancellable at the end of
each month by either party without penalty.
X determines that the initial contract term is only one month and that the contract
term will always be one month under this arrangement. This is because each party
has the unilateral, enforceable right to terminate the contract at the end of the
then-current month without compensating the other party.
A new contract is deemed to exist each month once each party chooses not to
use its cancellation right for that period.
Contract term affects many parts of the standard
The determination of the contract term is important because it may affect

the measurement and allocation of the transaction price, the collectability
assessment, the timing of revenue recognition for up-front non-refundable fees,
contract modifications, and the identification of material rights.
Consideration payable on termination can affect assessment of

contract term
If a contract can be terminated by compensating the other party and the right to
compensation is considered substantive, then its duration is either the specified
period or the period up to the point at which the contract can be terminated
without compensating the other party.
However, if a contract can be terminated by either party without substantive

compensation, then its term does not extend beyond the goods and services
already provided.
In making the assessment of whether the right to compensation is substantive,
an entity considers all relevant factors, including legal enforceability of the right
to compensation on termination. If an entity has a past practice of not enforcing
a termination penalty and that practice changes the legally enforceable rights
and obligations, then that could affect the contractual term.
Compensation is broader than only termination payments
A payment to compensate the other party on termination is any amount (or

other transfer of value – e.g. equity instruments) other than a payment due as
a result of goods or services transferred up to the termination date. It is not
restricted only to payments explicitly characterised as termination penalties.
Ability of either party to cancel the contract at discrete points in

time may limit the contract term
If an entity enters into a contract with a customer that can be renewed or

cancelled by either party at discrete points in time without significant penalty,
then it accounts for its rights and obligations as a separate contract for the
period during which the contract cannot be cancelled by either party. On
commencement of each service period (e.g. a month in a month-to-month
arrangement), in which the entity has begun to perform and the customer
has not cancelled the contract, the entity normally obtains enforceable rights
relative to fees owed for those services and a contract exists.
1.3 Consideration received before a contract exists |
Evergreen contracts
For the purpose of assessing contract term, an evergreen contract (i.e. a

contract that automatically renews) that is cancellable by either party each
period (e.g. on a month-to-month basis) without penalty is no different from a
similar contract structured to require the parties to actively elect to renew the
contract each period (e.g. place a new order, sign a new contract). In these
situations, an entity should not automatically assume a contract period that
extends beyond the current period (e.g. the current month).
Only the customer has a right to terminate the contract
If only the customer has the right to terminate the contract without penalty
and the entity is otherwise obliged to continue to perform until the end of a
specified period, then the initial contract term ends on the earliest date on
which the customer can terminate. The contract is evaluated to determine
whether the customer option to continue the contract for the specified period
gives the customer a material right (for discussion of customer options for
additional goods or services, see Section 10.4).
1.3 Consideration received before a contract exists

IFRS 15.15–16 The following flowchart outlines when consideration received from a contract that is
not yet in the scope of the standard can be recognised.
Has the contract been terminated and is the Yes

consideration received non-refundable?
Recognise
No
consideration
received
Are there no remaining performance as revenue
obligations and has all, or substantially all, Yes
of the consideration been received and
is it non-refundable?
No
Recognise consideration received as a liability
The entity is, however, required to reassess the arrangement and, if Step 1 of the
model is subsequently met, begin applying the revenue model to the arrangement.
Example 11 – Cumulative catch-up adjustment for consideration

received before a contract exists
IFRS 15.16 Company C and Customer D enter into a 12-month service agreement that
requires D to pay service fees of 800 per month. The agreement expires on
31 May, but C continues to deliver services and D continues to pay 800 a month.
A new agreement requiring a fee of 1,000 per month is signed on 31 July, which
applies retrospectively from 1 June.
C’s legal counsel advises that an enforceable obligation for D to pay C for
services provided in June and July did not exist before the new agreement was
executed on 31 July. C therefore concludes that a contract did not exist in June
and July.
Because the existing contract was terminated on 31 May, C records the June and
July payments of 1,600 received from D as revenue only once performance in
those months is complete and substantially all of the promised consideration of
1,600 is collected and non-refundable.
Alternatively, if that was not the case then C would defer 1,600 of consideration
received and recognise it as a liability until there was an enforceable contract
(31 July). C would recognise 2,000 as of 31 July on a cumulative catch-up basis
(1,000 for each month) once the agreement is enforceable because the pricing
of 1,000 applies from 1 June. For further discussion of the timing of revenue
recognition when an entity initially concludes that a contract does not exist and
subsequently determines that a contract does exist, see 5.3.1.
However, if it had been determined that an enforceable contract existed as of
1 June even in the absence of a formally executed agreement on 31 July, then
revenue would have continued to be recognised on a monthly basis based on
a legal interpretation of the enforceable rights and obligations of the parties.
Because the monthly fee amount may be uncertain, C would be required to
estimate the total amount of variable consideration (subject to the constraint)
to which it would be entitled in exchange for transferring the promised
services (for further discussion of variable consideration and the constraint,
see Section 3.1). In this case, the signing of the contract on 31 July would be
accounted for either as an adjustment to the variable consideration or, if the
consideration was not deemed to be variable, as a contract modification. For
further discussion of contract modifications, see Section 8.2.
Revenue recognition may be deferred for a significant period
If an entity cannot conclude that a legally enforceable contract exists, then

it may be difficult to evaluate when all or substantially all of the promised
consideration has been received and is non-refundable. In some cases, an
entity may have a deposit liability recognised for a significant period of time
before it can conclude that a contract exists in the model or that the criteria for
recognising the consideration as revenue are met.
1.4 Combination of contracts |
A receivable is generally not recognised when the collectability

threshold is not met
Generally, when an entity concludes that a contract does not exist because the
collectability threshold is not met, the entity does not record a receivable for
consideration that it has not yet received, for the goods or services transferred
to the customer.
1.4 Combination of contracts

IFRS 15.17 The following flowchart outlines the criteria in the standard for determining when an
entity combines two or more contracts and accounts for them as a single contract.
Are the contracts entered into at or near the same No

time with the same customer or related parties
of the customer?
Yes Account
for as
Are one or more of the following criteria met? separate
Contracts were negotiated as a single contracts
commercial package
Consideration in one contract depends on No
the other contract
Goods or services (or some of the goods
or services) are a single performance
obligation (see Chapter 3)
Yes
Account for contracts as a single contract
Example 12 – Combination of contracts: Software-related licence

and customisation services
Software Company S enters into a contract to license its customer relationship

management software to Customer B. Three days later, in a separate contract,
S agrees to provide consulting services to significantly customise the licensed
software to function in B’s IT environment. B is unable to use the software until
the customisation services are complete.
S determines that the two contracts should be combined because they were
entered into at nearly the same time with the same customer, and the goods
or services in the contracts are a single performance obligation. For further
discussion on identifying the performance obligations in a contract (Step 2 of
the model), see Chapter 2.
Example 13 – Combination of contracts with government-related

entities
Developer D enters into a contract to develop and sell a cyber security system
to Government-related Entity X. Three days later, in a separate contract, D
enters into a contract to sell the same system to Government-related Entity Y.
Both entities are controlled by the same government. During the negotiations
D agrees to sell the systems at a deep discount if both X and Y purchase
the system.
D concludes that the two contracts should be combined because, among
other things, X is a related party of Y, the contracts were entered into at nearly
the same time and the contracts were negotiated as a single commercial
package. D also needs to assess whether the two systems represent a single
performance obligation.
Example 14 – Combination of contracts: Equipment and

modification services
Company X sells equipment, Product P. P functions as designed without any

customisation or modification services and can be installed at a customer site
without X’s assistance.
X enters into a contract with Customer R to sell P. After 45 days, X and R enter
into a separate agreement for X to provide services to modify R’s equipment P.
The services include significant modification of P that enhances and changes
its functionality.
Although they are executed separately, the two agreements are negotiated
during the same time period (even though commencement and completion of
the negotiations are not held over the same period) and largely by the same X
and R personnel.
X concludes that, if the two contracts were combined, P and the service to
customise P would be a single performance obligation (see Chapter 2). X also
concludes that the two agreements were negotiated as a package with a single
commercial objective – i.e. to enable R to use the customised equipment.
Therefore, because the contract for P and the services agreement are entered
into near the same time, the two agreements constitute a single contract.
X accounts for the transfer of P and the customisation services as a single
1.4 Combination of contracts |
Evaluating ‘at or near the same time’ when determining whether

contracts should be combined
IFRS 15.BC68 The accounting for a contract depends on an entity’s present rights and
obligations, rather than on how the entity structures the contract. The standard
does not provide a bright line for evaluating what constitutes ‘at or near the
same time’ to determine whether contracts should be combined for the
purpose of applying the standard. Therefore, an entity should evaluate its
specific facts and circumstances when analysing the elapsed period of time.
Specifically, the entity should consider its business practices to determine
what represents a minimum period of time that would provide evidence that
the contracts were negotiated at or near the same time. Additionally, the entity
should evaluate why the arrangements were written as separate contracts and
how the contracts were negotiated (e.g. both contracts negotiated with the
same parties vs different divisions within the entity negotiating separately with
a customer).
An entity needs to establish procedures to identify multiple contracts initiated

with the same customer on a timely basis to ensure that these arrangements
are evaluated to determine whether they should be combined into a single
contract for accounting purposes.
In addition, an entity should consider whether a separate agreement is a
modification to the original agreement and whether it should be accounted for
as a new contract or as part of the existing contract. For a discussion of contract
modifications, see Chapter 8.
Definition of related parties acquires new significance
IFRS 15.BC74, IAS 24 The standard specifies that for two or more contracts to be combined, they
should be with the same customer or related parties of the customer. The Board
stated that the term ‘related parties’ as used in the revenue standard has the
same meaning as the definition in the related party standard. This means that
the definition originally developed in IFRS for disclosure purposes acquires a
new significance, because it can affect the recognition and measurement of
revenue transactions.
No exception for contracts entered into with different divisions of

the same entity
There is no exception from considering whether two or more contracts should

be combined because they were executed by different divisions of the entity
or the customer. In fact, contracts with related parties of the customer that
may not even be part of the same consolidated entity are considered for
possible combination.
However, whether the contracts were negotiated by the same parties or,
instead, were negotiated with different divisions of the entity or the customer
may in practice influence whether any of the three specified criteria in the
standard are met.
For example, two contracts entered into by different divisions of one or
both parties may be less likely to have been ‘negotiated as a package with
a single commercial objective’ or to have goods or services that are a single
Additional complexities for sales through distribution channels
When applying the guidance on combining contracts, an entity needs to

determine who the customer is under the contract. Contracts entered into by
an entity with various parties in the distribution channel that are not customers
of the entity are not combined.
For example, for carmakers the customer for the sale of a vehicle is typically
a dealer, whereas the customer for a lease of a vehicle is typically the end
consumer. Because the dealer and the end consumer are not related parties,
these contracts (the initial sales contract for the vehicle to the dealer and the
subsequent lease contract with the end consumer) are not evaluated for the
purpose of combining them, and are treated as separate contracts. However,
in other situations an entity’s customer may be acting as an agent for the end
consumer. In these situations, the contracts will need to be evaluated for the
purpose of combining them.
IFRS 15.BC74 However, performance obligations that an entity implicitly or explicitly promises
to an end consumer in a distribution channel – e.g. free services to the end
customer when the entity’s sale is to an intermediary party – are evaluated
as part of the contract. For further discussion on identifying the performance
obligations in a contract (Step 2 of the model), see Chapter 2.
2 Step 2 – Identify the performance obligations in the contract | 23
2 Step 2 – Identify
the performance
obligations in the
contract
Overview
The process of identifying performance obligations requires an entity to

determine whether it promises to transfer either goods or services that are
distinct, or a series of distinct goods or services that meet certain conditions.
These promises may not be limited to those explicitly included in written
contracts. The standard provides indicators to help determine when the
‘distinct’ criteria are met.
IFRS 15.22–23, 26 A ‘performance obligation’ is the unit of account for revenue recognition. An
entity assesses the goods or services promised in a contract with a customer and
identifies as a performance obligation either a:
– good or service (or a bundle of goods or services) that is distinct (see
Section 2.1); or
– series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer (i.e. each distinct good or service
in the series is satisfied over time and the same method is used to measure
progress) (see Section 2.3).
This includes an assessment of implied promises and administrative tasks (see
Section 2.2).
2.1 Distinct goods or services

IFRS 15.22 A single contract may contain promises to deliver to the customer more than one
good or service. At contract inception, an entity evaluates the promised goods or
services to determine which goods or services (or bundle of goods or services) are
distinct and therefore constitute performance obligations.
A good or service is ‘distinct’ if both of the following criteria are met.
IFRS 15.27
Criterion 1: Criterion 2:
Capable of being distinct Distinct within the context
of the contract
Can the customer benefit
from the good or service on and Is the entity’s promise to
its own or together with transfer the good or
other readily service separately identifiable
available resources? from other promises
in the contract?
Yes No
Not distinct – combine with

Distinct – performance obligation
other goods and services
IFRS 15.28 Criterion 1 Good or service is capable of being distinct

A customer can benefit from a good or service if it can be used,
consumed, sold for an amount that is greater than scrap value or
otherwise held in a way that generates economic benefits.
A customer can benefit from a good or service on its own or in
conjunction with:
– other readily available resources that are sold separately by the
entity or by another entity; or
– resources that the customer has already obtained from the
entity (e.g. a good or service delivered up-front) or from other
transactions or events.
The fact that a good or service is regularly sold separately by the
entity is an indicator that the customer can benefit from a good or
service on its own or with other readily available resources.
2.1 Distinct goods or services |
IFRS 15.29 Criterion 2 Distinct within the context of the contract

The objective when assessing whether an entity’s promises to
transfer goods or services are distinct within the context of the
contract is to determine whether the nature of the promise is to
transfer each of those goods or services individually, or whether
the promise is to transfer a combined item or items to which the
promised goods or services are inputs.
The standard provides the following indicators to help in evaluating
whether two or more promises to transfer goods or services to a
customer are not separately identifiable.
– The entity provides a significant service of integrating the
goods or services with other goods or services promised in
the contract into a bundle of goods or services that represent
the combined output or outputs for which the customer has
contracted. This occurs when the entity is using the goods or
services as inputs to produce or deliver the output or outputs
specified by the customer. A combined output (or outputs)
might include more than one phase, element or unit.
– One or more of the goods or services significantly modifies or
customises, or is significantly modified or customised by, one or
more of the other goods or services promised in the contract.
– The goods or services are highly interdependent or highly
inter‑related, such that each of the goods or services is
significantly affected by one or more of the other goods
or services.
This list of indicators is not exhaustive.
IFRS 15.30 If a promised good or service is determined not to be distinct, then an entity
continues to combine it with other promised goods or services until it identifies
a bundle of goods or services that is distinct. In some cases, this results in the
entity accounting for all of the goods or services promised in a contract as a single
For guidance and discussion on determining whether the promise to transfer a
licence along with other goods or services is distinct, see Section 9.2.
Example 1 – Single performance obligation in a contract
IFRS 15.IE45–IE48 Construction Company C enters into a contract with Customer D to design
and build a hospital. C is responsible for the overall management of the project
and identifies goods and services to be provided – including engineering, site
clearance, foundation, procurement, construction, piping and wiring, installation
of equipment and finishing.
C identifies goods and services that will be provided during the hospital
construction that might otherwise benefit D on its own. For example, if each
construction material is sold separately by other entities, then it could be
resold for more than scrap value by D. It could also be sold together with other
readily available resources such as additional materials or the services of
another contractor.
However, C notes that the goods and services to be provided under the contract
are not separately identifiable from the other promises in the contract. Instead,
C is providing a significant integration service by combining all of the goods and
services in the contract into the combined item for which D has contracted – i.e.
the hospital.
Therefore, C concludes that the second criterion is not met and that the
individual activities are not distinct and therefore are not separate performance
obligations. Therefore, it accounts for the bundle of goods and services to
construct the hospital as a single performance obligation.
Example 2 – Multiple performance obligations in a contract
Telco T has a contract with Customer R that includes the delivery of a handset
and two years of voice and data services.
The handset can be used by R to perform certain functions – e.g. calendar,
contacts list, email, internet access, accessing apps via Wi-Fi and to play music
or games.
Additionally, there is evidence of customers reselling handsets on an online
auction site and recapturing a portion of the selling price of the phone. T also
regularly sells its voice and data services separately to customers, through
renewals or sales to customers who acquire handsets from an alternative
vendor – e.g. a retailer.
T concludes that the handset and the wireless services are two separate
performance obligations based on the following evaluation.
Criterion 1 Capable of being distinct

– R can benefit from the handset either on its own (i.e.
because the handset has stand-alone functionalities
and can be resold for more than scrap value and has
substantive, although diminished, functionality that is
separate from T’s network) or together with the wireless
services, which are readily available to R because T sells
those services separately.
– R can benefit from the wireless services in conjunction
with readily available resources – i.e. either the handset is
already delivered at the time of contract set-up, it could be
purchased from alternative retail vendors or the wireless
service could be used with a different handset.
Criterion 2 Distinct within the context of the contract

– The handset and the wireless services are separable in
this contract because they are not inputs into a single
asset (i.e. a combined output), which demonstrates that
T is not providing a significant integration service.
– Neither the handset nor the wireless service significantly
modifies or customises the other.
– R could purchase the handset and the voice/data services
from different parties (e.g. R could purchase the handset
from a retailer), which provides evidence that the handset
and voice/data services are not highly dependent on, or
highly inter-related with, each other.
Applying the indicators will require judgement
The standard does not include a hierarchy or weighting of the indicators of

whether a good or service is separately identifiable from other promised goods
or services within the context of the contract. An entity evaluates the specific
facts and circumstances of the contract to determine how much emphasis to
place on each indicator.
Certain indicators may provide more compelling evidence in the separability
analysis than others in different scenarios or types of contracts. For example,
factors such as the degree of customisation, complexity, customer’s motivation
for purchasing goods or services, contractual restrictions and the functionality
of individual goods or services may have differing effects on the distinct analysis
for different types of contracts.
In addition, the relative strength of an indicator, in light of the specific facts
and circumstances of a contract, may lead an entity to conclude that two or
more promised goods or services are not separable from each other within the
context of the contract. This may occur even if the other two indicators might
suggest separation.
To help an entity apply the indicators, the standard includes many examples
illustrating their application. The following table summarises them.
IFRS 15.IE45–IE65A Example Description of scenario Conclusion
10A Entity provides a significant integration Single

service for a building construction and performance
delivers a single output to the customer obligation
10B Entity provides a significant integration Single

service and delivers multiple complex performance
and specialised items as single outputs to obligation
the customer
11A Entity provides the customer with Multiple

software, installation, unspecified performance
upgrades and telephone support from obligations
which it can benefit separately
11B Entity provides the customer with Single

installation services that involve performance
significant customisation of the obligation
underlying software
11C & 11D Entity provides the customer with Multiple

equipment and a separately identifiable performance
installation service; customer is required obligations
to use entity’s installation service in 11D
11E Entity provides the customer with Multiple

equipment and proprietary consumables performance
that are separately identifiable obligations
12A Entity provides the customer with a Multiple

good and an explicit promise to provide a performance
service to the customer’s customer, who obligations
purchases the good
12B Entity provides the customer with a Multiple

good and an implicit promise to provide a performance
service to the customer’s customer, who obligations
purchases the good
12C Entity provides the customer’s customer Single

with a service that is not part of its performance
promise to the customer obligation
(service is not
a performance
obligation of the
contract)
Applying Criterion 2 requires an entity to assess whether there

is a transformative relationship between the two items being
analysed
IFRS 15.BC116K The International Accounting Standards Board (the Board) noted that the
evaluation of whether an entity’s promise to transfer a good or service is
separately identifiable from other promises in the contract considers the
relationship between the various goods or services in the contract in the
context of the process of fulfilling the contract. An entity considers the level of
integration, inter-relation or interdependence among promises to transfer goods
or services in evaluating whether the goods or services are distinct.
The Board also observed that an entity does not merely evaluate whether
one item, by its nature, depends on the other (i.e. whether the items have
a functional relationship). Instead, an entity evaluates whether there is a
transformative relationship between the two items in the process of fulfilling
the contract.
Separability of risks considered in determining whether goods or

services are separately identifiable
IFRS 15.BC105, BC116J–BC116K, IU 03-18 In evaluating whether goods or services are separately identifiable, an entity
considers whether the risks that it assumes to fulfil its obligations to transfer
goods or services are inseparable.
The IFRS Interpretations Committee discussed a scenario in which an entity
enters into a contract with a customer to transfer a plot of land and to construct
a building on that plot of land. The Committee noted that in determining
whether there is a significant service of integrating the land and the building
into a combined output, an entity considers whether the risks that it assumes
in transferring the land to the customer are inseparable from the risks that it
assumes in constructing the building – i.e. whether its performance would be
any different if it did not also transfer the land and vice versa.
The Committee also noted that in determining whether the land and the building
are highly interdependent or highly inter-related, the entity considers whether it
would be able to fulfil its promise to transfer the land even if it did not construct
the building and whether it would be able to fulfil its promise to construct the
building even if it did not transfer the land.
The Committee observed that an entity’s promise to transfer the land would be
separately identifiable from its promise to construct the building if:
– its performance in constructing the building would be the same regardless of
whether it transferred the land; and
– it would be able to fulfil each promise without fulfilling the other.
Goods or services promised to a customer’s customer may be a

performance obligation
IFRS 15.BC92 In some industries, a manufacturer may promise goods or services as sales
incentives to the end customers of its customer to encourage the sale of its
products through the distribution channel. The standard requires an entity to
evaluate the promise to the customer’s customer to determine whether it is a
performance obligation in the contract with the customer.
Examples of these circumstances are a carmaker that offers free maintenance
services to customers who purchase cars from dealerships, a software provider
that implicitly offers customer support or updates to end users of its software
and a consumer goods company that provides mail-in offers for free goods to
end customers.
These promises may be made explicitly in the contract with the customer
or implied by an entity’s customary business practices, published policies or
specific statements. For more discussion on implied promises, see Section 2.2.
Contractual restrictions may not be determinative
IFRS 15.BC100 Contracts between an entity and a customer often include contractual
limitations or prohibitions. These may include prohibitions on reselling a
good in the contract to a third party or restrictions on using certain readily
available resources – e.g. the contract may require a customer to purchase
complementary services from the entity in conjunction with its purchase of a
good or licence.
IFRS 15.IE58E–IE58F In Example 11D in the standard, the customer is contractually required to use
the seller’s installation service to install the purchased good. The example notes
that the contractual restriction does not affect the assessment of whether the
installation services are considered distinct. Instead, the entity applies Criteria 1
and 2 to assess whether the installation services are distinct. By applying these
criteria, Example 11D illustrates that substantive contractual provisions alone do
not lead to a conclusion that the goods and services are not distinct.
IFRS 15.BC100 A contractual restriction on the customer’s ability to resell a good – e.g. to
protect an entity’s intellectual property (IP) – may prohibit an entity from
concluding that the customer can benefit from a good or service, on the basis
of the customer not being able to resell the good for more than scrap value
in an available market. However, if the customer can benefit from the good
(e.g. telephone support) together with other readily available resources (e.g. a
software licence), even if the contract restricts the customer’s access to those
resources (by requiring the customer to use the entity’s products or services),
then the entity may conclude that the good or service has benefits to the
customer and that the customer could purchase or not purchase the products or
services without significantly affecting that good.
Example 3 – Telco: Purchased modem and router with internet
Telco T enters into a two-year contract for internet services with Customer C.
C also buys a modem and a router from T and obtains title to the equipment.
T does not require customers to purchase its modems and routers and
will provide internet services to customers using other equipment that is
compatible with T’s network. There is a secondary market in which modems and
routers can be bought or sold for amounts greater than scrap value.
T concludes that the modem and router are each distinct and that the
arrangement includes three performance obligations (the modem, the router
and the internet services) based on the following evaluation.

– C can benefit from the modem and router on their own
because they can be resold for more than scrap value.
– C can benefit from the internet services in conjunction
with readily available resources – i.e. either the modem
and router are already delivered at the time of contract set-
up, they could be bought from alternative retail vendors
or the internet service could be used with different
equipment.

– T does not provide a significant integration service.
– The modem, router and internet services do not modify or
customise one another.
– C could benefit from the internet services using routers
and modems that are not sold by T. Therefore, the modem,
router and internet services are not highly dependent on or
highly inter-related with each other.
Example 4 – Telco: Wi-Fi hotspot access
Telco T offers a premium internet package that includes, among other services,
access to Wi-Fi hotspots. Alternatively, T offers a basic internet package
that allows, for an additional fee, the same access to Wi-Fi hotspots as the
premium package.
T determines that the access to the Wi-Fi hotspots is distinct from the other
network services. This is because customers can benefit from the Wi-Fi hotspot
access on its own (i.e. it is sold separately). Furthermore, this service is distinct
within the context of the contract because the Wi-Fi hotspot access is not highly
inter-related with the network services. This is because the customer could
choose not to take Wi-Fi hotspot access and the network services would not be
significantly affected.
Example 5 – Technology company: Ongoing support that is not

distinct
Company V grants Customer C a three-year licence for anti-virus software.

Under the contract, V promises to provide C with when-and-if-available updates
to that software during the licence period. The updates are critical to the
continued use of the anti-virus software.
V concludes that the licence and the updates are capable of being distinct
because the anti-virus software can still deliver its original functionality during
the licence period without the updates. C can also benefit from the updates
together with the licence transferred when the contract is signed.
However, V concludes that the licence and the updates are not separately
identifiable because the software and the service are inputs into a combined
item in the contract − i.e. the nature of V’s promise is to provide continuous
anti-virus protection for the term of the contract. Therefore, V accounts for the
licence and the updates as a single performance obligation.
Example 6 – Technology company: Software licence and

customisation services
Company M licenses Product P – asset management system software − to

customers. P functions as designed without any customisation or modification
and can be implemented without M’s help in its standard form.
M enters into a contract with Bank B to grant a licence of P and to provide
customisation services. This includes modifying certain off-the-shelf settings
− e.g. adding an option to access and value a portfolio in multiple foreign
currencies. The customisation of P is expected to take a long time and will
significantly affect B’s ability to use P.
M evaluates the promised goods and services in the contract to determine the
number of separate performance obligations.
M determines that the software licence and the customisation services are
capable of being distinct, because:
– B could derive benefit from the licence for P on its own or with readily
available implementation services; and
– B can benefit from the customisation services together with the licence to P
that is transferred at contract inception.
However, M determines that the licence and the customisation services are
not separately identifiable – i.e. there is a single performance obligation. This is
because:
– the customisation services significantly customise P; and
– P, in its off-the-shelf form, and the customisation services are inputs into
the combined output that the customer has contracted to receive − i.e. the
customised software.
Example 7 – Technology company: Hosted software with on-

premises application
Company D offers its customers access to its hosted software, which permits
access to D’s data. A customer can then manipulate that data in a variety of
ways. The software is hosted only on D’s servers and is accessible only in
online mode. D also offers customers use of an on-premises application that
converts the data into other, more useable, formats – e.g. an Excel spreadsheet.
However, the on-premises application can provide search results only when it
is connected to the hosted software. There are no other hosted applications
that a customer can use with D’s on-premises application and D does not sell
access separately.
D concludes that the licence for the hosted software is not capable of being
distinct from its hosting services. This is because the software can be used only
while it is hosted on D’s servers and is not available separately in the market.
D also concludes that the on-premises application is not capable of being
distinct, because customers cannot benefit from the on-premises feature
without the hosted software or together with other readily available resources.
Example 8 – Media company: Magazine subscription that includes

printed copies and access to online content
Media Company P offers magazine subscriptions to customers. When

customers subscribe, they receive a printed copy of the magazine each month
and access to the magazine’s online content.
P evaluates whether the promises to provide printed copies and online access
are separate performance obligations. P determines that the arrangement
includes two performance obligations for the following reasons.
– The printed copies and online access are both capable of being distinct
because the customer could use them on their own.
– The printed copies and online access are distinct within the context of the
contract because they are different formats so they do not significantly
customise or modify each other, nor is there any transformative relationship
into a single output.
Example 9 – Automotive supplier: Pre-production activities are not

distinct from prototype
Automotive Supplier S enters into a contract with Carmaker B to supply a

prototype of a specialised component as part of a new product that B is
developing. The component is based on a newly developed technology and
supplying it will require extensive pre-production engineering activity. According
to the contract, B has the right to the IP resulting from S’s activities and S
is obliged to provide periodic updates on its development process, which B
requires for the development of other parts of the product.
B guarantees that S will be compensated for the costs of the engineering
activities, including a reasonable margin. However, B does not commit to a
minimum quantity of parts. Any subsequent purchase order will be priced in
accordance with its stand-alone selling price. Therefore, S observes that the
contract does not include a promise to produce additional components. Further,
it concludes that the contract does not provide a material right to purchase
components at a discount (see Section 10.4).
S concludes that it effectively transfers the know-how arising from its pre-
production activities to B. Therefore, it identifies two promises in its contract
with B:
– pre-production engineering activities; and
– production of a component prototype.

S assesses the promises in the contract and determines that
each of the promised goods and services is capable of being
distinct. This is because B can benefit from the IP generated
by the pre-production activities using readily available
production services offered by other suppliers. S can also
produce the prototype using IP that it has already transferred
to B.

When determining whether the pre-production activities
and the production of the prototype are distinct within the
context of the contract, S notes that there is a transformative
relationship between the two, because the outcome of the
engineering and the development process will determine
to a great extent the structure of the prototype. It also
notes that the nature of the promise to B is to provide it
with a customised prototype, built to its specifications.
Therefore, it concludes that the pre-production activities and
the production of the prototype are a single performance
obligation.
2.2 Implied promises and administrative tasks |
2.2 Implied promises and administrative tasks

IFRS 15.24–25 Promises to transfer a good or service can be explicitly stated in the contract or be
implicit based on established business practices or published policies that create a
valid expectation that the entity will transfer the good or service to the customer.
Conversely, administrative tasks do not transfer a good or service to the customer
and are not performance obligations – e.g. administrative tasks to set up a contract.
Example 10 – Implied promise to reseller’s customers
Software Company K enters into a contract with Reseller D, which then sells
software products to end users. K has a customary business practice of
providing free telephone support to end users without involving the reseller, and
both expect K to continue to provide this support.
In evaluating whether the telephone support is a separate performance
obligation, K notes that:
– D and the end customers are not related parties and, as such, these
contracts will not be combined; and
– the promise to provide telephone support free of charge to end users is
considered a service that meets the definition of a performance obligation
when control of the software product transfers to D.
As a result, K accounts for the telephone support as a separate performance
obligation in the transaction with D.
Example 11 – Administrative task: Registration of software keys
Software Company B licenses and transfers operating system software to

Customer L. The operating system software will not function on L’s computer
hardware without a key provided by B. L has to provide B with the serial number
from the hardware to receive the key. If L orders hardware from a different
supplier and has not received the hardware when the operating system
software is delivered, then it is still obliged to pay for the operating system
software because payment is not contingent on delivery of the key.
In this example, the operating system software is ready for use by L

and delivery of the key is contingent only on L’s actions. As such, it is an
administrative task that does not transfer a promised good or service and
therefore is not considered to be a promised service in the contract. Assuming
that all other revenue recognition criteria have been met – including L obtaining
control of the operating system software – B recognises revenue on delivery
of the operating system software. For discussion on the timing and pattern of
recognition of licences, see Section 9.4.
Only promises that transfer goods or services to the customer

can be performance obligations
IFRS 15.BC93, BC411(b) An entity does not account for a promise that does not transfer goods or
services to the customer. For example, an entity’s promise to defend its patent,
copyright or trademark is not a performance obligation.
Set-up activities as administrative task
A software-as-a-service (SaaS) provider may perform tasks that are necessary

for the customer to access its web-based software application. These tasks
range from a simple activation service in some situations to more complex up-
front activities needed to allow the customer to access the SaaS services from
the customer’s IT platform.
Generally, these types of set-up activities provide no incremental benefit
to the customer and therefore constitute an administrative task. However,
the necessity of completing these activities before the customer can begin
accessing the underlying service may affect the timing of when revenue
recognition may begin.
Providing end-user documentation is generally an administrative

task
Providing end-user documentation (e.g. instruction manuals) is generally an

administrative task if it is provided to allow the customer to obtain the inherent
utility of the good or service (i.e. does not provide incremental benefit to the
customer).
Conversely, information of an advisory or consulting nature that helps the
customer do more than simply achieve the base utility from the good or service
may provide incremental benefit to the customer and therefore represent a
good or service to be transferred to the customer.
Distinguishing between an administrative task and a promised

good or service
The transfer of a promised good or service requires the customer to be able to

obtain the benefit from that good or service. Therefore, an activity that does not
provide any benefit beyond access to other goods or services is generally an
administrative task or set-up activity.
In general, set-up activities involving the entity’s own systems or IP will not
provide the customer with incremental benefits and therefore do not represent
goods or services. Examples of set-up activities include the following.
2.2 Implied promises and administrative tasks |
– Activation of a wireless contract: Entities may charge a fee to activate a

wireless customer’s access to the network and to cover the cost of required
tasks such as setting up the wireless service, processing a new customer
in the billing system and performing a credit check. These activities do not
provide the customer with benefit beyond allowing the customer to access
the subsequent services.
– Outsourcing contracts: An entity may need to design or build technology for
its internal use to provide a service to a customer. The costs of designing
and migrating data for internal use to provide services to the customer in
the future do not provide the customer with incremental benefits beyond
accessing the service.
– Software as a service: A SaaS provider may implement a user interface
that permits the customer to access its online platform. These activities,
permitting the customer to access the SaaS for which it has contracted,
provide no incremental benefit beyond the customer accessing the platform.
However, goods or services transferred to a customer that provide some
measure of benefit beyond solely being able to access another good or service
will generally be promised goods or services. When another entity provides
similar services to customers on a stand-alone basis or the customer could
perform the tasks, it is a strong indicator that the good or service is a promised
service rather than a set-up activity.
Examples of up-front activities that are generally promised goods or services
include:
– performing customer-specific services that enhance the customer’s asset;
and
– providing training services to permit the customer to use the service more
effectively.
Example 12 – Implied performance obligation: Pre- and post-sale

incentives
Carmaker N has a historical practice of offering free maintenance services

– e.g. oil changes and tyre rotation – for two years to the end customers of
dealers who buy its vehicles. However, the two years’ free maintenance is not
explicitly stated in the contract with its dealers, but it is typically stated in N’s
advertisements for the vehicles.
Therefore, the maintenance is treated as a separate performance obligation
in the sale of the vehicle to the dealer. Revenue from the sale of the vehicle is
recognised when control of the vehicle is transferred to the dealer. Revenue
from the maintenance services is recognised as the maintenance services are
provided to the retail customer.
IFRS 15.IE64–IE65 However, if N did not have a customary business practice of offering free
maintenance, and instead announced a maintenance programme as a limited-
period sales incentive after control of the vehicle has transferred to the dealer,
then the free maintenance would not be a separate performance obligation in
the sale of the vehicle to the dealer.
In this case, N would recognise the full amount of revenue when control of the
vehicle was transferred to the dealer. If N subsequently created an obligation
by announcing that it would provide incentives, then N would accrue as an
expense its expected cost of providing maintenance services on the vehicles
in the distribution channel – i.e. controlled by dealers – when the programme
was announced.
Determining whether a sales incentive to end customers was offered before

or after sale to the dealer will be challenging for some entities, especially for
implied sales incentives in which the entity has a customary business practice
of offering incentives or does so on a seasonal basis. The entity will need to
assess whether the dealer and customer have a valid expectation that the entity
will provide a free service.
Example 13 – Technology company: Set-up activities vs

implementation services
Company S enters into a contract to provide Customer C with a licence to its

hosted software for three years.
As part of the contract and before commencement of the licence term, S
creates C’s user interface so that C can access the software. S also agrees to
convert and migrate C’s data to the new software.
S evaluates each of these activities and concludes that:
– creating the user interface is a set-up activity rather than a promised service
to C, because it provides no incremental benefit to C beyond permitting C to
access and use the software; and
– the data conversion and migration activities are services that give C
incremental benefits beyond the ability to access and use the software. The
data conversion and migration activities that S performs would otherwise
need to be performed by C or another service provider. Therefore, S
determines that the data conversion and migration activities represent a
service to C and assesses whether they represent a separate performance
obligation from the ongoing hosting services.
2.3 Series of distinct goods or services |
Example 14 – Telco: Activation fee in a wireless contract
Telco T charges a one-time activation fee of 25 to Customer C when C enters

into a wireless contract for a voice and data plan. The activation of a new
wireless customer to the network requires various tasks, including setting up
the wireless service, processing C in the billing system and credit checks.
T determines that activation activities are administrative in nature and therefore
do not constitute a separate promise to C to be assessed as a separate
performance obligation. Because the activation fee is charged at contract
inception and is not refundable, T applies the guidance on non-refundable up-
front fees (see Section 10.6).
2.3 Series of distinct goods or services

IFRS 15.22(b) A contract may contain promises to deliver a series of distinct goods or services
that are substantially the same. At contract inception, an entity assesses the goods
or services promised in the contract and determines whether the series of goods
or services is a single performance obligation. This is the case when they meet the
following criteria.
IFRS 15.23
The goods or services are substantially the same
+
Each distinct good or service in the series is a performance
obligation satisfied over time
(see Section 5.2)
+
The same method would be used to measure progress towards
satisfaction of each distinct good or service in the series
(see Section 5.3)
=
A single performance obligation
Example 15 – Series of distinct goods or services treated as a

single performance obligation
Contract Manufacturer X agrees to produce 1,000 customised widgets for use

by Customer C in its products. X concludes that the widgets will transfer to C
over time because:
– they have no alternative use to X; and
– C is contractually obliged to pay X for any finished or in-progress widgets,
including a reasonable margin, if C terminates the contract for convenience.
X already has the process in place to produce the widgets and is given the
design by C, such that X does not expect to incur any significant learning curve
or design and development costs. X uses a method of measuring progress
towards complete satisfaction of its manufacturing contracts that takes into
account work in progress and finished goods controlled by C.
X concludes that each of the 1,000 widgets is distinct, because:
– C can use each widget on its own; and
– each widget is separately identifiable from the others because one does not
significantly affect, modify or customise another.
Despite the fact that each widget is distinct, X concludes that the 1,000 units
are a single performance obligation because:
– each widget will transfer to C over time; and
– X uses the same method to measure progress towards complete satisfaction
of the obligation to transfer each widget to C.
Consequently, X recognises the transaction price for all 1,000 widgets over time
using an appropriate measure of progress. This outcome may be different from
the outcome of allocating a fixed amount to each widget if each one were a
Example 16 – Distinct service periods within a long-term service

contract
Cable Company R enters into a two-year service contract with Customer

M to provide cable television service for a fixed fee of 100 per month. R has
concluded that its cable television service is satisfied over time because M
consumes and receives the benefit from the service as it is provided – e.g.
customers generally benefit from each day that they have access to R’s service.
R determines that each increment of its service – e.g. day or month – is distinct
because M benefits from that period of service on its own. Additionally, each
increment of service is separately identifiable from those preceding and
following it – i.e. one service period does not significantly affect, modify or
customise another. However, R concludes that its contract with M is a single
performance obligation to provide two years of cable television service because
each of the distinct increments of service is satisfied over time. Also, R uses the
same measure of progress to recognise revenue on its cable television service
regardless of the contract’s time period.
No exemption from applying the series guidance
If the series guidance requirements are met for a good or service, then that
series is treated as a single performance obligation (i.e. the series guidance is
not optional).
Accounting for a series is intended to provide a simplification of

the model
IFRS 15.BC113–BC114 The Board believes that accounting for a series of distinct goods or services
as a single performance obligation if they are substantially the same and meet
certain criteria generally simplifies application of the model and promotes
consistency in identifying performance obligations in a repetitive service
arrangement. For example, without the guidance on series of goods or services,
an entity may need to allocate consideration to each hour or day of service in a
cleaning service contract.
The Board also gave transaction processing and the delivery of electricity as
examples of a series of goods or services.
However, in some cases applying the series guidance may complicate

application of the model. For example, this may be the case for common
transactions in certain industries (e.g. aerospace and defence) and other types
of transactions that involve producing a relatively small number of products
that meet the series guidance. For this reason, some stakeholders requested
amendments to the standard to make application of the series guidance
optional. The Board declined to do so and reiterated that this guidance is
not optional.
IFRS 15.BC115 However, if the contract is modified then the entity considers the distinct goods
or services, rather than the performance obligation. This in turn simplifies the
accounting for the contract modification (see Chapter 8).
Determining the nature of the entity’s promise to the customer is

the first step in applying the series guidance
Determining the nature of the entity’s promise is the first step in determining
whether the series guidance applies. For example, if the nature of the promise
is the delivery of a specified quantity of a good or service, then the evaluation
considers whether each good or service is distinct and substantially the same.
Conversely, if the nature of the entity’s promise is to stand ready or to provide
a single service for a period of time (i.e. there is not a specified quantity to
be delivered), then the evaluation will probably focus on whether each time
increment, rather than the underlying activities, is distinct and substantially
the same.
Identifying distinct goods or services as a series may affect the

allocation of variable consideration
Even if per-unit pricing is fixed, if the quantity related to a series is not specified
then it results in variable consideration (see Chapter 3). However, an entity
is not required to allocate variable consideration across the distinct goods or
services included in a series on a stand-alone selling price basis. Instead, it
follows the general guidance in the standard on allocating variable consideration
entirely to a performance obligation or a distinct good or service that forms part
of a performance obligation (see Chapter 4). For example, this may be relevant if
the goods or services in the series and any other performance obligations in the
contract are priced at market rates.
Not necessary for goods or services to be provided consecutively
To apply the series guidance, it is not necessary for the goods to be delivered
or services performed consecutively over the contract period. There may be
a gap or an overlap in delivery or performance and this would not affect the
assessment of whether the series guidance applies.
Although the Board specifically contemplated a consecutively delivered
contract (e.g. repetitive service arrangement), it did not make this distinction a
criterion for applying the series guidance.
Example 17 – Automotive supplier: Series of distinct goods
Automotive Supplier S enters into a framework agreement with Carmaker C to

produce specialised sensors for a fixed price of 200 per sensor. Subsequently,
C places a non-cancellable purchase order for 1,000 sensors. The framework
agreement and the purchase order constitute a contract in the scope of
the standard.
S concludes that each sensor is capable of being distinct and is distinct in the
context of the contract because:
– the sensors individually provide a benefit;
– one sensor does not significantly affect, modify or customise another; and
– S does not provide a significant integration service.
S also determines that the contract meets the criteria for the revenue to be
recognised over time. S concludes that the distinct sensors meet the series
criteria because:
– all 1,000 sensors are of the same design: i.e. substantially the same;
– they meet the over-time criteria; and
– the measure of progress is the same because each sensor is manufactured
identically.
Therefore, the 1,000 sensors are accounted for as a single performance
obligation for which revenue is recognised over time, with a transaction price
of 200,000.
S expects to incur significant learning curve costs in the production of the
first units. Therefore, if S chose a cost-to-cost measure of progress for the
performance obligation, then revenue recognised for the earlier units produced
would be more than 200 per sensor and revenue for the later units produced
would be less than 200 per sensor.
Example 18 – Investment management: Series of distinct services
Investment Management Company S enters into a five-year contract with

a customer to provide investment management services. S receives a 2%
quarterly management fee based on the assets under management at the end
of each quarter.
S concludes that the individual time increments of service within the five-year
contract are distinct from each other. Criterion 1 is met because the customer
can benefit from each time increment of service provided independently
of the others. Criterion 2 is met because each time increment does not
significantly modify or customise the others and S is not providing a service of
combining the time increments together to create a single combined output for
the customer.
S concludes that the distinct time increments meet the series criteria because:
– the services provided in each time increment are substantially the same;
– the services meet the over-time criteria, because the customer consumes
the benefits of the services as they are provided; and
– the same method to measure progress would apply to each time increment
of service – i.e. a time-based measure of progress.
Therefore, S treats the contract as a single performance obligation.
Example 19 – Telco: Term wireless service contract with fixed fee

and limited usage
Telco T enters into a two-year wireless contract with Customer C to provide

120 minutes of voice service for a fixed fee of 20 per month. The voice plan
allows C to use 120 minutes each month for calls and the handset will not
function for voice purposes once the minutes are used. The 120 minutes expire
at the end of every month.
T concludes that the voice services are satisfied over time because C receives
and consumes the benefit from the services as they are provided – e.g.
customers generally benefit from each minute that they receive T’s services.
T determines that each minute is distinct because C benefits from that minute
of service on its own. Additionally, each minute is separable from those
preceding and following it – i.e. one service period does not significantly affect,
modify or customise another.
T applies the series guidance and concludes that its contract with C is a single
performance obligation to provide 2,880 minutes (120 × 24 months) of wireless
service. T determines that each of the distinct minutes of voice is satisfied over
time and the same method would be used to measure progress.
Example 20 – Automotive: Maintenance contract
Carmaker M enters into a 10-year maintenance contract with Customer C. M

provides C with an integrated service of maintenance and related activities for
equipment that M sold to C. C pays M based on the equipment hours used
during the contract period, regardless of whether M performs maintenance or
makes repairs during that period.
M concludes that it is providing a stand-ready service to C because the nature of
the promise is to deliver an unknown quantity of the underlying activities as an
integrated service when and as needed by C for 10 years.
M concludes that each day of service is distinct, because C can continually
benefit from the equipment covered by the contract and each day is separately
identifiable – i.e. one service period does not significantly affect, modify or
customise another.
However, M applies the series guidance and concludes that its contract with C
is a single performance obligation to provide 10 years of maintenance, because
revenue will be recognised over time as C consumes the benefit of the service
as it’s provided and the same measure of progress would be applied for each
distinct increment because the promise is the same for each increment.
Example 21 – Transaction processor: Processing arrangement
Transaction Processor P enters into a 10-year transaction processing

arrangement with Customer C under which P will provide continuous access
to its system and process all transactions on behalf of C. C is charged a fee
for each transaction processed but the number of transactions processed is
outside the control of C.
P concludes that its promise is to stand ready to process transactions on
behalf of C as they arise over the contract period. P concludes that each day of
service is substantially the same because the nature of the promise (to provide
continuous access to the platform) is the same for each increment.
P concludes that each day’s service is considered distinct because C can benefit
from accessing its system each day and each day is separately identifiable – i.e.
one service period does not significantly affect, modify or customise another.
However, P applies the series guidance and concludes that its contract with
C is a single performance obligation to provide transaction processing services
for 10 years because revenue will be recognised over time as C consumes the
benefit of the service as it is provided and the same measure of progress will
be applied for each distinct increment because the promise is the same for
each increment.
3 Step 3 – Determine the

transaction price
Overview
IFRS 15.47
The ‘transaction price’ is the amount of consideration to which an entity expects
to be entitled in exchange for transferring goods or services to a customer,
excluding amounts collected on behalf of third parties – e.g. certain sales taxes.
To determine this amount, an entity considers multiple factors.
IFRS 15.49 An entity estimates the transaction price at contract inception, including any
variable consideration, and updates the estimate each reporting period for any
changes in circumstances. When determining the transaction price, an entity
assumes that the goods or services will be transferred to the customer based
on the terms of the existing contract and does not take into consideration the
possibility of a contract being cancelled, renewed or modified.
In determining the transaction price, an entity considers the following components.
IFRS 15.48
Variable consideration (and the Significant financing
constraint) (see Section 3.1) component (see Section 3.2)
An entity estimates the amount of For contracts with a significant

variable consideration to which it financing component, an entity adjusts
expects to be entitled, giving the promised amount of consideration
consideration to the risk of revenue to reflect the time value of money
reversal in making the estimate
Transaction
price
Non-cash consideration Consideration payable to
(see Section 3.3) a customer (see Section 3.4)
Non-cash consideration is measured An entity needs to determine

at fair value, if that can be reasonably whether consideration payable to
estimated; if not, then an entity uses a customer represents a reduction of
the stand-alone selling price of the the transaction price, a payment for a
good or service that was promised in distinct good or service, or a
exchange for non-cash consideration combination of the two
3 Step 3 – Determine the transaction price | 47
3.1 Variable consideration (and the constraint) |
IFRS 15.9(e), 60 Customer credit risk is not considered when determining the amount to which an
entity expects to be entitled – instead, credit risk is considered when assessing
the existence of a contract (see Chapter 1). However, if the contract includes
a significant financing component provided to the customer, then the entity
considers credit risk in determining the appropriate discount rate to use (see
Section 3.2).
IFRS 15.58, B63 There is an exception to the variable consideration guidance for sales- or usage-
based royalties arising from licences of intellectual property (IP) (see Section 9.6).
Transaction price may include amounts not paid by the customer
IFRS 15.47, BC187 The transaction price may include amounts that are not paid by the customer.
For example, a healthcare company may include amounts to be received
from the patient, insurance companies and government organisations in
determining the transaction price. In another example, a retailer may include
in the transaction price amounts received from a manufacturer as the result of
coupons or rebates issued by the manufacturer directly to the end customer.
Transaction price may include fair value of derivative on

settlement date
IU 03-19 The transaction price may include the fair value of a derivative on the settlement
date of a sales contract that does not meet the ‘own use’ scope exception in the
financial instruments standard. For example, an entity may enter into a contract
to sell non-financial items that fall in the scope of the financial instruments
standard. The entity accounts for the contract as a derivative measured at fair
value through profit or loss. At the settlement date, the entity physically settles
the contract by delivering the non-financial items. If the entity’s accounting
policy for such contracts is to recognise revenue for the sale of non-financial
items on a gross basis, then the transaction price includes cash received and
the fair value of the derivative on the settlement date.
3.1 Variable consideration (and the constraint)

IFRS 15.51–52 Items such as discounts, rebates, refunds, rights of return, early settlement
discounts, credits, price concessions, incentives, performance bonuses, penalties
or similar items may result in variable consideration. Promised consideration
can also vary if it is contingent on the occurrence or non-occurrence of a future
event – e.g. the sale of an office building in which the consideration depends on
the level of occupancy of the building at a future date. Variability may be explicit
or implicit, arising from customary business practices, published policies or
specific statements, or any other facts and circumstances that would create a valid
expectation by the customer.
IFRS 15.53, 56, 58 An entity assesses whether, and to what extent, it can include an amount of variable
consideration in the transaction price at contract inception. The following flowchart
sets out how an entity determines the amount of variable consideration in the
transaction price, except for sales- or usage-based royalties from licences of IP (see
Section 9.6).
Is the consideration variable or fixed?
Variable Fixed
Estimate the amount using the expected

value or most likely amount (see 3.1.1)
Apply the constraint – i.e. determine the portion, if

any, of that amount for which it is highly probable
that a significant revenue reversal will not
subsequently occur (see 3.1.2)
Include the amount in the transaction price
IFRS 15.55 An entity recognises a refund liability for consideration received or receivable if it
expects to refund some or all of the consideration to the customer.
The standard applies the mechanics of estimating variable consideration in a variety
of scenarios, some of which include fixed consideration – e.g. sales with a right
of return (see Section 10.1) and customers’ unexercised rights (breakage) (see
Section 10.5).
Example 1 – Enterprise service contract with usage fee treated as

variable consideration
IFRS 15.22(b), 23 Telco T enters into a contract with Customer C to provide call centre services.
These services include providing dedicated infrastructure and staff to stand
ready to answer calls. T receives consideration of 0.50 per minute for each call
answered.
T observes that C does not make separate purchasing decisions every time
a user places a call to the centre and that the nature of the services provided
to C is substantially the same in each case. Therefore, T concludes that its
performance obligation is the overall service of standing ready to provide call
centre services, rather than each call answered being the promised deliverable.
It therefore concludes that the per-minute fee is variable consideration.
Example 2 – Enterprise service contract with penalties
Telco B enters into an agreement to provide data hosting services to a large

business customer, Company C, for a period of five years. Certain service-level
agreements (SLAs) are signed by B as part of the contract with C. Specifically,
the SLAs will result in a reduction of consideration paid by C to B, if B does not
meet a specified level of service. Because the SLAs are part of the contract with
C, the SLA penalties create variable consideration.
Therefore, B estimates the amount of the penalties at contract inception in
determining the transaction price. For a discussion on the variable consideration
allocation exception, see Section 4.2.
Consideration can be deemed to be variable even if the price

stated in the contract is fixed
IFRS 15.BC190–BC194 The guidance on variable consideration may apply in a wide variety of
circumstances. The promised consideration may be variable if an entity’s
customary business practices and relevant facts and circumstances indicate
that the entity may accept a lower price than what is stated in the contract – i.e.
the contract contains an implicit price concession or the entity has a history of
providing price concessions or price support to its customers.
In these cases, it may be difficult to determine whether the entity has implicitly
offered a price concession or whether it has chosen to accept the risk of default
by the customer of the contractually agreed consideration (customer credit
risk). Entities need to exercise judgement and consider all of the relevant facts
and circumstances in making this determination (see Section 3.1).
A fixed rate per unit of output may be variable consideration
When an entity enters into a contract with a customer for an undefined quantity
of output at a fixed contractual rate per unit of output, the consideration may
be variable. In some cases there may be substantive contractual terms that
indicate that a portion of the consideration is fixed – e.g. contractual minimums.
For contracts with undefined quantities, it is important to appropriately evaluate
the entity’s underlying promise to determine how the variability created by
the unknown quantity should be treated under the standard. For example, the
entity’s underlying promise could be a series of distinct goods or services (see
Section 2.3), a stand-ready obligation or an obligation to provide the specified
goods or services. Unknown quantities could also represent customer options
for additional goods or services for which the entity will need to consider
whether a material right exists (see Section 10.4).
Quantity subject to confirmation after delivery is variable

consideration
In some contracts, the actual quantity delivered may be confirmed after

control transfers to the customer (see Chapter 5). For example, a mining
entity transfers control of copper concentrate to a customer and then the
customer determines the actual quantity of copper delivered after processing
the concentrate. The final amount paid by the customer is based on this actual
quantity. It appears that these arrangements, in which the transaction price may
vary depending on the quantity subject to confirmation after delivery, represent
variable consideration.
Provisional pricing based on market price of commodity
IASBU 12-15 Some contracts may contain provisional pricing features under which the
transaction price is based on the spot rate of the commodity at the payment
due date. This may be later than the date at which the performance obligation
is satisfied. In contrast with the scenarios discussed above, variability arising
solely from changes in the market price after control transfers is not subject
to the variable consideration guidance in the standard. This is because at the
delivery date a receivable already exists and it is in the scope of the financial
instruments standard.
Variable consideration or optional purchases
Different outcomes and disclosure requirements can arise depending on

whether an entity concludes that purchases of additional goods or services
by a customer are exercises of customer options or variable consideration.
Future purchases that are options will be evaluated to determine whether
they include a material right. Future purchases that are variable consideration
are included in the initial identification of performance obligations and
determination of the transaction price, and may lead to additional estimation
and disclosure requirements.
Distinguishing between customer options and variable consideration will
require significant judgement and will require entities to assess the nature of
their promise to the customer and evaluate the presently enforceable rights and
obligations of the parties to the arrangement.
– Options for additional goods or services: The customer has a present
contractual right to purchase additional distinct goods or services. Each
exercise of an option is a separate purchase decision and transfer of control
of additional goods and services by the entity if the customer is not currently
obliged under the contract to do so. Before the customer’s exercise of the
option, the vendor is not obliged to provide those goods or services and
does not have a right to receive consideration. The customer options need
to be evaluated to determine whether they provide the customer with a
material right.
– Variable consideration: The contract with the customer obliges the vendor
to stand ready to transfer the promised goods or services and the customer
does not make a separate purchase decision for the additional goods or
services to be provided by the vendor. The future event that results in
additional consideration occurs as the performance obligation is being
satisfied (i.e. when control of the goods or services is transferred to
the customer).
Volume discounts or rebates may be variable consideration or

may convey a material right
Different structures of discounts and rebates may have a different effect on the
transaction price. For example, some agreements provide a discount or rebate
that applies to all purchases made under the agreement – i.e. the discount or
rebate applies on a retrospective basis once a volume threshold is met. In other
cases, the discounted purchase price may apply only to future purchases once a
minimum volume threshold has been met.
If a discount applies retrospectively to all purchases under the contract once the
threshold is achieved, then the discount represents variable consideration. In
this case, the entity estimates the volumes to be purchased and the resulting
discount in determining the transaction price and updates that estimate
throughout the term of the contract.
However, if a tiered pricing structure provides discounts for future purchases
only after volume thresholds are met, then the entity evaluates the arrangement
to determine whether the arrangement conveys a material right to the customer
(see Section 10.4). If a material right exists, then this is a separate performance
obligation, to which the entity allocates a portion of the transaction price. If a
material right does not exist, then there are no accounting implications for the
transactions completed before the volume threshold is met and purchases after
the threshold has been met are accounted for at the discounted price.
A transaction price denominated in a foreign currency does not

constitute variable consideration
IFRS 15.68 When a contract is denominated in a foreign currency, changes in exchange

rates may affect the amount of revenue recognised by an entity when it is
measured in the entity’s functional currency. However, this does not constitute
variable consideration for the purpose of applying the standard because the
variability relates to the form of the consideration (i.e. the currency) and not to
other factors.
Instead, an entity applies the guidance on foreign currency transactions
and translation to assess whether and, if so, how to translate balances and
transactions denominated in a foreign currency.
Liquidated damages may represent variable consideration or a

product warranty
IFRS 15.51 Many contracts contain terms providing for liquidated damages and similar
compensation to the customer on the occurrence or non-occurrence of certain
events. These terms may represent variable consideration or a warranty.
Judgement is required to determine the appropriate accounting. For further
discussion, see 10.2.1.
3.1.1 Estimate the amount of variable consideration

IFRS 15.53 When estimating the transaction price for a contract with variable consideration,
an entity’s initial measurement objective is to determine which of the following
methods best predicts the consideration to which the entity will be entitled.
The entity considers the sum of probability-weighted

amounts for a range of possible consideration amounts. This
Expected
may be an appropriate estimate of the amount of variable
value
consideration if an entity has a large number of contracts
with similar characteristics.
The entity considers the single most likely amount from

a range of possible consideration amounts. This may
Most likely
be an appropriate estimate of the amount of variable
amount
consideration if the contract has only two (or perhaps a few)
possible outcomes.
IFRS 15.54, BC195 The method selected is applied consistently throughout the contract and to similar
types of contracts when estimating the effect of uncertainty on the amount of
variable consideration to which the entity will be entitled.
Example 3 – Estimate of variable consideration: Expected value
Electronics Manufacturer M sells 1,000 televisions to Retailer R for 500,000

(500 per television). M provides price protection to R by agreeing to reimburse
R for the difference between this price and the lowest price that it offers for that
television during the following six months. Based on M’s extensive experience
with similar arrangements, it estimates the following outcomes.
Price reduction in next six months Probability
0 70%
50 20%
100 10%
After considering all relevant facts and circumstances, M determines that

the expected value method provides the best prediction of the amount of
consideration to which it will be entitled. As a result, it estimates the transaction
price to be 480 per television – i.e. (500 × 70%) + (450 × 20%) + (400 × 10%) –
before considering the constraint (see 3.1.2).
Example 4 – Estimate of variable consideration: Most likely amount
Construction Company C enters into a contract with Customer E to build an

asset. Depending on when the asset is completed, C will receive either 110,000
or 130,000.
Outcome Consideration Probability
Project completes on time 130,000 90%

Project is delayed 110,000 10%
Because there are only two possible outcomes under the contract, C
determines that using the most likely amount provides the best prediction
of the amount of consideration to which it will be entitled. C estimates the
transaction price – before it considers the constraint (see 3.1.2) – to be 130,000,
which is the single most likely amount.
All facts and circumstances are considered when selecting

estimation method
IFRS 15.BC200 The use of a probability-weighted estimate, especially when there are only two
possible outcomes, could result in revenue being recognised at an amount
that is not a possible outcome under the contract. In these situations, using
the most likely amount may be more appropriate. However, all facts and
circumstances need to be considered when selecting the method that best
predicts the amount of consideration to which an entity will be entitled.
Expected value method – No need to quantify less probable

outcomes
IFRS 15.BC201 When using a probability-weighted method to estimate the transaction price,
a limited number of discrete outcomes and probabilities can often provide a
reasonable estimate of the distribution of possible outcomes. Therefore, it may
not be necessary for an entity to quantify all possible outcomes using complex
models and techniques.
Expected value method – Estimated amount does not need to be

a possible outcome for an individual contract
When an entity has a population of similar transactions, it may be appropriate

to use this portfolio of data to estimate the transaction price for an individual
contract using the expected value method. In this case, the transaction price
may be an amount that is not a possible outcome for an individual contract but
that is still representative of the expected transaction price.
It is important for an entity to have a sufficiently large number of similar
transactions to conclude that the expected value method is the best estimate
of the transaction price. Using a portfolio of data to help in estimating the
transaction price for a contract is not the same as applying the portfolio approach
(see Section 6.4).
An entity uses judgement to determine whether:
– its contracts with customers are sufficiently similar;
– the contracts with customers from which the expected value is derived are
expected to remain consistent with subsequent contracts; and
– the volume of similar contracts is sufficient to develop an expected value.
For example, if there are three possible outcomes for the transaction price, then
the entity calculates an expected value as follows.
Transaction price Probability Weighting
100,000 30% 30,000

110,000 45% 49,500
130,000 25% 32,500
Expected value 100% 112,000
Although 112,000 is not a possible outcome, when the conditions are met, the
expected value is appropriate because the entity is really estimating that 30%
of the transactions will result in 100,000, 45% of the transactions will result
in 110,000 and 25% of the transactions will result in 130,000 which, in the
aggregate, will be representative of the entity’s expectations of the price for
each transaction.
Historical experience may be a source of evidence
IFRS 15.53, 56, 79(a), BC200 An entity may use a group of similar transactions as a source of evidence when
estimating variable consideration, particularly under the expected value method.
The estimates using the expected value method are generally made at the
contract level, not at the portfolio level. Using a group as a source of evidence in
this way is not itself an application of the portfolio approach (see Section 6.4).
For example, an entity may enter into a large number of similar contracts
whose terms include a performance bonus. Depending on the outcome of each
contract, the entity either will receive a bonus of 100 or will not receive any
bonus. Based on its historical experience, the entity expects to receive a bonus
of 100 in 60 percent of the contracts. To estimate the transaction price for future
individual contracts of this nature, the entity considers its historical experience
and estimates that the expected value of the bonus is 60. This example
illustrates that when an entity uses the expected value method, the transaction
price may be an amount that is not a possible outcome of an individual contract.
The entity needs to use judgement to determine whether the number of similar
transactions is sufficient to develop an expected value that is the best estimate
of the transaction price for the contract and whether the constraint (see 3.1.2)
should be applied.
A combination of methods may be appropriate
IFRS 15.BC202 The standard requires an entity to use the same method to measure a given
uncertainty throughout the contract. However, if a contract is subject to more
than one uncertainty, then an entity determines an appropriate method for each
uncertainty. This may result in an entity using a combination of expected values
and most likely amounts within the same contract.
For example, a construction contract may state that the contract price will
depend on:
– the price of a key material, such as steel: this uncertainty will result in a range
of possible consideration amounts, depending on the price of steel; and
– a performance bonus if the contract is finished by a specified date: this
uncertainty will result in two possible outcomes, depending on whether the
target completion date is achieved.
In this case, the entity may conclude that it is appropriate to use an expected
value method for the first uncertainty and a most likely amount method for the
second uncertainty. Once the methods are selected, the entity cannot change
them and needs to apply each method consistently throughout the duration of
the contract.
Example 5 – Estimate of variable consideration: Expected value:

Multiple-tier rebates
Pharmaceutical Company M enters into a contract to sell to Customer F a drug

for 10 per unit. The arrangement includes no minimum purchase quantities. At
the end of each year, F is entitled to a rebate on its annual purchases. Based
on M’s extensive experience with similar arrangements, it estimates the
following outcomes.
Units purchased Per-unit rebate Probability
0–100,000 10% 40%

100,001–1,000,000 20% 50%
1,000,001+ 30% 10%
After considering all relevant facts and circumstances, M determines that

the expected value method provides the best prediction of the amount of
consideration to which it will be entitled. As a result, it estimates the amount of
the rebate to be 17% – i.e. (10% × 40%) + (20% × 50%) + (30% × 10%).
Therefore, M estimates the transaction price at 8.3 (10 × (1 - 0.17)) per unit
before it considers the constraint (see 3.1.2).
Example 6 – Estimate of variable consideration: Most likely

amount: One-tier rebate
Food Company F enters into an arrangement with Customer C to supply

Product P. The arrangement includes a fixed price of 1.0 per unit and an annual
retrospective rebate – i.e. if total sales in an annual period exceed 500, then C is
entitled to a rebate of 0.1 on every item purchased in that year. The arrangement
includes no minimum purchase quantities but F expects that C will purchase
approximately 1,000 units annually.
Purchases Rebate
0–500 -
501+ 0.10
C makes an initial purchase of 100 units. F considers the effect of the rebate
arrangement and determines that, because the rebate arrangement is a
retrospective arrangement, the contract includes variable consideration.
Therefore, in determining the transaction price for the sale of 100 units, F needs
to incorporate any expected rebate. F uses the most likely amount method to
estimate the amount because there are only two possible prices: C will pay
either 1 per unit or 0.9 per unit. If the rebate included multiple tiers, then the
expected value approach would probably be a more appropriate method to
estimate the variable consideration.
F assesses the likelihood of selling more than 500 units to C using historical
sales data for C and other similar customers and forecast sales based on current
market conditions. F determines that it is 80% likely that C will purchase more
than 500 units and, therefore, that the expected price per unit is 0.90.
F estimates the transaction price to be 90 (see 3.1.2).
Conversely, if the rebate applied prospectively – e.g. if F’s total sales to C were
1,000 such that C received a rebate of 0.10 × 500 – then the rebate arrangement
would be evaluated to determine whether it represented a material right (see
Section 10.4).
3.1.2 Determine the amount for which it is highly probable

that a significant reversal will not occur (‘the constraint’)
IFRS 15.56 After estimating the variable consideration, an entity may include some or all of
it in the transaction price – but only to the extent that it is highly probable that a
significant reversal in the amount of cumulative revenue will not occur when the
uncertainty associated with the variable consideration is subsequently resolved.
IFRS 15.57 To assess whether – and to what extent – it should apply this ‘constraint’, an entity
considers both the:
– likelihood of a revenue reversal arising from an uncertain future event; and
– potential magnitude of the revenue reversal when the uncertainty related to the
variable consideration has been resolved.
In making this assessment, the entity uses judgement, giving consideration to all
facts and circumstances – including the following factors, which could increase the
likelihood or magnitude of a revenue reversal.
– The amount of consideration is highly susceptible to factors outside the entity’s
influence – e.g. volatility in a market, the judgement or actions of third parties,
weather conditions and a high risk of obsolescence.
– The uncertainty about the amount of consideration is not expected to be resolved
for a long time.
– The entity’s experience with (or other evidence from) similar types of contracts is
limited or has limited predictive value.
– The entity has a practice of either offering a broad range of price concessions
or changing the payment terms and conditions of similar contracts in similar
circumstances.
– The contract has a large number and a broad range of possible consideration
amounts.
IFRS 15.59 This assessment needs to be updated at each reporting date.
IFRS 15.58 There is an exception for sales- or usage-based royalties arising from licences of IP
(see Section 9.6).
Example 7 – Applying the constraint: Investment management

contract
IFRS 15.IE129–IE133 Investment Manager M enters into a two-year contract to provide investment
management services to its customer Fund N, a non-registered investment
partnership. N’s investment objective is to invest in equity instruments issued
by large listed companies. M receives the following fees payable in cash for
providing the investment management services.
Quarterly management 2% per quarter, calculated on the basis of the

fee fair value of the net assets at the end of the
most recent quarter
Performance-based 20% of the fund’s return in excess of an

incentive fee observable market index over the contract
period
M determines that the contract includes a single performance obligation

(series of distinct services) that is satisfied over time and that both the
management fee and the performance fee are variable consideration. Before
including the estimates of consideration in the transaction price, M considers
whether the constraint should be applied to either the management fee or the
performance fee.
At contract inception, M determines that the cumulative amount of
consideration is constrained because the promised consideration for both
the management fee and the performance fee is highly susceptible to factors
outside its own influence. At each subsequent reporting date, M makes the
following assessment of whether any portion of the consideration continues to
be constrained.
Quarterly management M determines that the cumulative amount of

fee consideration from the management fee to
which it is entitled is not constrained, because
it is calculated based on asset values at the end
of each quarter. Therefore, once the quarter
finishes the consideration for the quarter is
known. M determines that it can allocate the
entire amount of the fee to the completed
quarters, because the fee relates specifically
to the service provided for those quarters
(see Section 4.2).
Performance-based M determines that the full amount of the

incentive fee performance fee is constrained and therefore
excluded from the transaction price. This is
because:
– the performance fee has a high variability
of possible consideration amounts and the
magnitude of any downward adjustment
could be significant;
– although M has experience with similar
contracts, that experience is not predictive
of the outcome of the current contract
because the amount of consideration is
highly susceptible to volatility in the market
based on the nature of the assets under
management; and
– there are a large number of possible
outcomes.
As a result, M determines that the revenue recognised during the reporting

period is limited to the quarterly management fees for completed quarters. This
determination is made each reporting date and could change towards the end of
the contract period.
Example 8 – Applying the constraint: Success fee
Bank B enters into a contract with Customer E to help it with an equity

placement. Under the contract, in addition to a fixed amount B will receive a
bonus of 1 million if the placement is successful.
Outcome Bonus Probability
Successful 1 million 75%

Unsuccessful - 25%
Because there are only two possible outcomes related to the bonus under the
contract, B determines that using the most likely amount provides the best
prediction of the amount of consideration to which it will be entitled. Therefore,
using the most likely amount method, B estimates the variable consideration
that it expects to be entitled to as 1 million.
B also applies the constraint to evaluate whether it is limited in the amount of
this estimate that it can include in the transaction price. As part of evaluating
the application of the constraint, B considers the magnitude of the variable
amount and the likelihood of a reversal. Although B has a lot of experience with
these arrangements, the payment is highly susceptible to market volatility,
which is outside the control of both B and E. B therefore concludes that the
variable consideration should be constrained to zero until the equity placement
is undertaken.
A similar evaluation would be required for success-based fees related to other

types of advisory arrangements – e.g. mergers and acquisitions and debt
restructurings.
Constraint assessment made against cumulative revenue
When constraining its estimate of variable consideration, an entity assesses the

potential magnitude of a significant revenue reversal relative to the cumulative
revenue recognised – i.e. for both variable and fixed consideration, rather than
on a reversal of only the variable consideration. The assessment of magnitude
is relative to the transaction price for the contract, rather than the amount
allocated to the specific performance obligation.
Specified level of confidence included in constraint requirements
IFRS 15.BC209 The inclusion of a specified level of confidence – ‘highly probable’ – clarifies
the notion of whether an entity expects a significant revenue reversal. This is
an area of significant judgement and entities need to align their judgemental
thresholds, processes and internal controls with these requirements.
Documenting these judgements is also critical.
Constraint introduces an element of prudence
IFRS 15.BC207 The constraint introduces a downward bias into estimates, requiring entities
to exercise prudence before they recognise revenue – i.e. they have to make a
non-neutral estimate. This exception to the revenue recognition model reflects
the particular sensitivity with which revenue reversals are viewed by many
users of financial statements and regulators.
Example 9 – Applying the constraint: Consideration based on

occupancy of property
Developer D buys land and obtains approval to develop a retail centre. This is
the first development that it has undertaken in a new regeneration zone – e.g.
conversion of an industrial area into a retail centre.
D then enters into a contract with Company V, a large listed property fund, to
sell the land and retail centre for a fixed price of 1 million and an amount based
on occupancy levels one year after completion. D determines that control of the
land and retail centre will transfer on completion of the development.
At the completion date, D has estimated the variable consideration amount to

be 500,000 using the expected value method. D then applies the constraint
guidance and notes that:
– D does not have previous experience with similar contracts;
– occupancy levels are outside D’s control;
– the uncertainty will not be resolved for a long time; and
– the range of possible outcomes is large.
As a result, D concludes that the amount of variable consideration should be
constrained to zero. D re-evaluates its conclusions at each reporting date until
the uncertainty is resolved.
Example 10 – Applying the constraint: Consideration dependent on

regulatory approval
Biotech Company B enters into a contract with Pharma Company C for

Compound X, which is under development. Under the arrangement, C
will receive a licence for X and B will continue to perform the research and
development activities required to take X through to commercialisation. Under
the contract, B will receive an up-front payment of 2,000, an additional 5,000 if
regulatory approval is granted and 2% of any future sales of X made by C.
B identifies the 5,000 payable if regulatory approval is obtained as variable
consideration and uses the most likely amount approach to estimate it. Using this
approach, B assesses that it is 60% likely that regulatory approval will be obtained,
and therefore its unconstrained estimate of the variable consideration is 5,000.
However, before including this estimate in the transaction price, B applies the
constraint guidance. B notes that:
– payment is considered highly uncertain;
– the uncertainty is highly susceptible to factors outside B’s control;
– the uncertainty will not be resolved for a long time; and
– the payment is significant to the overall transaction price.
For these reasons, B concludes that the constrained amount should be zero.
The variable consideration guidance is not applied to the sales-based royalty
because it is subject to the royalty exception – see Section 9.6.
Therefore, B determines that the transaction price of the arrangement is initially
2,000, being the up-front payment.
Example 11 – Applying the constraint: Bonus payment
Investment Manager M enters into a three-year contract to provide investment

management services to Fund L. L is nearing its final liquidation and M is asked
to execute the investment policy during the run-off period. M will be entitled to
a significant bonus at the end of the contract if the proceeds from the liquidation
of L’s assets exceed 2 million. M notes that:
– L’s net asset value at the end of Year 2 was 5 million: i.e. the fair value of the
remaining assets in the fund is significantly in excess of 2 million;
– L’s remaining assets have low risk; and
– market volatility and macro-economic variables affecting L’s asset value
indicate that a significant decrease is very unlikely to occur.
Therefore, during Year 3 M may be able to conclude that:
– it is sufficiently likely that the proceeds from L’s liquidation will exceed the
required threshold; and
– it is highly probable that a significant reversal in the amount of cumulative
revenue recognised will not occur at the end of the contract.
If this is the case, then M may include the expected bonus in the transaction
price during Year 3, before the final resolution of the uncertainty.
Example 12 – Applying the constraint: Price concessions
Company E licenses enterprise resource planning (ERP) software to its

customers and provides post-contract support services throughout the licence
period. To retain its existing customers, E has developed a practice of frequently
giving its customers a discount on the post-contract support fees stated in the
original contract for the final year. This discount has ranged from 20% to 60%
with no discernible pattern.
E enters into a contract with Customer C for a three-year licence of its ERP
software for 300,000 (paid up-front) and 180,000 in total for three years of post-
contract support services, paid in three 60,000 instalments at the beginning
of each year. The software licence and the post-contract support services
constitute two separate performance obligations. E transfers the software
licence to C at contract inception.
E concludes that its history of providing post-contract support fee discounts
means that the transaction price is variable and therefore needs to be
estimated. E uses an expected value method because there are many possible
outcomes. It estimates that it will give C a discount of 42% on the Year 3 post-
contract support fees.
3.2 Significant financing component |
Consequently, E’s estimate of the transaction price at contract inception –

before applying the constraint – is 454,8001. Assuming that the stand-alone
selling prices of the licence and the post-contract support services are 300,000
and 200,000 respectively, the relative stand-alone selling price allocation would
be as follows. Discounts and variable consideration are allocated between all
distinct goods or services in the contract unless specific criteria are met – see
Section 4.2.
Stand-alone Relative stand-

selling price alone selling price
Licence 300,000 272,880

Post-contract support 200,000 181,920
Because E has a history of granting price concessions of between 20% and

60% of the final year’s contractual post-contract support fees, including any
of the potential post-contract support discount less than the 60% maximum
in the transaction price carries the risk of a revenue reversal. However, E does
not constrain its estimate of the transaction price below 454,800 because the
revenue reversal that would result from the possible incremental discount of
18% (60% - 42%) or 10,8002 would not be significant to the cumulative revenue
recognised to date under the contract. For example, an adjustment to the
transaction price immediately after transfer of control of the software licence
would result in a reversal of only 6,4803 (compared with cumulative revenue
recognised of 272,880).
If E did not have a history of granting price concessions and it was not
expected at contract inception, then it would account for any subsequent price
concession as a contract modification (see Section 8.2).
Notes
1. Calculated as 480,000 - (42% × 60,000).
2. Calculated as 60,000 × 18%.
3. Calculated as 10,800 × (300,000 / 500,000).
3.2 Significant financing component

IFRS 15.60 To estimate the transaction price in a contract, an entity adjusts the promised
amount of consideration for the time value of money if that contract contains a
significant financing component.
IFRS 15.61 The objective when adjusting the promised amount of consideration for a significant
financing component is to recognise revenue at an amount that reflects what the
cash selling price of the promised good or service would have been if the customer
had paid cash at the same time as control of that good or service transferred to the
customer. The discount rate used is the rate that would be reflected in a separate
financing transaction between the entity and the customer at contract inception.
To make this assessment, an entity considers all relevant factors – in particular the:
– difference, if there is any, between the amount of promised consideration and
the cash selling price of the promised goods or services;
– combined effect of:
- the expected length of time between the entity transferring the promised
goods or services to the customer; and
- the customer paying for those goods or services; and
– prevailing interest rates in the relevant market.
IFRS 15.62 A contract does not have a significant financing component if any of the following
factors exists.
Factor Example
An entity receives an advance payment, and the A prepaid phone card or

timing of the transfer of goods or services to a customer loyalty points
customer is at the discretion of the customer
A substantial portion of the consideration A transaction whose

is variable, and the amount or timing of the consideration is a sales-
consideration is outside the customer’s or entity’s based royalty
control
The difference between the amount of promised Protection against

consideration and the cash selling price of the a counterparty not
promised goods or services arises for non-finance completing its obligations
reasons under the contract
IFRS 15.64 The standard indicates that:

– an entity should determine the discount rate at contract inception, reflecting the
credit characteristics of the party receiving credit; and
– the discount rate should not generally be updated for a change in circumstances.
IFRS 15.63 As a practical expedient, an entity is not required to adjust the transaction price for
the effects of a significant financing component if, at contract inception, it expects
the period between customer payment and the transfer of goods or services to be
one year or less.
For contracts with an overall duration greater than one year, the practical expedient
applies if the period between performance and payment for that performance is
one year or less.
Significant financing component?
Interest Practical expedient Interest

expense available income
Payment in Payment in
t-12 months t0 t+12 months
advance arrears
Performance
IFRS 15.65 The financing component is recognised as interest expense (when the customer
pays in advance), or interest income or revenue (when the customer pays in
arrears), and is presented separately from revenue from contracts with customers.
If after contract inception there is a change in the expected period between
customer payment and the transfer of goods or services, then it appears that
the transaction price – i.e. the promised amount of consideration adjusted for
the significant financing component – should not be revised for the effect of the
change in the expected period between payment and performance. Instead, an
entity should revise the period over which it recognises the difference between
the transaction price and the promised consideration as interest. This is because
the cash selling price of the goods or services is agreed by the parties at contract
inception and does not vary in response to changes in the estimated timing of
the transfer of the goods or services. If the entity had used the revised timing
at inception of the contract, then this would have changed either the amount of
promised consideration or the implied interest rate.
Example 13 – Significant financing component: Multiple-element

arrangement
Product Company B enters into a contract with Customer C to deliver

Products X and Y for 150,000 payable up-front. X will be delivered in two years
and Y in five years.
B determines that the contract contains two performance obligations that
are satisfied at the points in time at which the products are delivered to C. B
allocates the 150,000 to X and Y at an amount of 37,500 and 112,500 respectively
– i.e. based on their relative stand-alone selling prices. B concludes that the
contract contains a significant financing component and that a financing rate of
6% is appropriate based on B’s credit-standing at contract inception.
B accounts for the contract as follows.
Contract Recognise a contract liability for the payment of 150,000

inception
Years 1 During the two years from contract inception until the transfer
and 2 of X, recognise interest expense of 9,000 and 9,5401 on
150,000 at 6% for Years 1 and 2, respectively, for a cumulative
interest expense of 18,540
Recognise revenue of 42,1352 for the transfer of X
Years 3, 4 Recognise annual interest expense of 7,584, 8,039 and 8,5223

and 5 for Years 3, 4 and 5, respectively, based on the contract liability
at the beginning of Year 3 of 126,4054
Recognise revenue of 150,5505 for the transfer of Y
Notes
1. Calculated as 150,000 × 0.06 for Year 1 and 159.000 × 0.06 for Year 2.
2. Calculated as 37,500 + 4,635, being the initial allocation to X plus X’s portion of the
interest for Years 1 and 2 of the contract (37,500 / 150,000 × 18,540).
3. Calculated as 126,405 × 0.06 = 7,584; (126,405 + 7,584) × 0.06 = 8,039 and (126,405 +
7,584 + 8,039) × 0.06 = 8,522.
4. Calculated as 150,000 + 18,540 - 42,135, being the initial contract liability plus interest for
two years less the amount derecognised from the transfer of X.
5. Calculated as 126,405 + 24,145, being the contract liability balance after two years plus
interest for three years.
Example 14 – Significant financing component: Change in expected

completion date
Company K enters into a contract with Customer C to construct and deliver

a piece of equipment. K determines that the contract contains a single
performance obligation that is satisfied at a point in time when the equipment is
delivered to C. Construction is expected to take two years.
K and C agree consideration of 80, which is payable and paid on the date the
contract is signed.
At contract inception, K considers the terms of the sale and determines that the
contract includes a significant financing component because:
– there is a significant period between payment and delivery of the asset;
– the asset is regularly sold at a higher price; and
– there is no evidence to suggest the advance is for another reason.
K determines the discount rate, based on its credit characteristics, to be 12%.
Therefore, to reflect the financing that it is receiving from the advance payment,
K recognises interest expense of 20 in the construction period and revenue of
100 (80 × 1.122) on the delivery date.
After Year 1, K determines that the construction will take three rather than
two years.
K should revise the period over which it recognises the difference between the
transaction price and the promised consideration as interest expense. K should
not revise the transaction price of 100.
Example 15 – Determining whether an arrangement has a

significant financing component: Payment in advance
Technology Company T signs a three-year, non-cancellable agreement with

Customer C to provide hosting services. C may elect to pay either:
a. 140 per month (total payment is 5,040); or
b. 4,200 at the beginning of the contract term, with no additional monthly
payments.
T determines that the contract includes a financing component.
The difference in pricing between options (a) and (b) indicates that the
contractual payment terms under option (b) have the primary purpose of
providing T with financing. The cash selling price is the monthly fee of 140
because it reflects the amount due when the monthly hosting services are
provided to C. A comparison of the payment terms between options (a) and (b)
indicates total cumulative interest of 840 and an implied discount rate of 13%.
T considers whether factors indicating that a significant financing component
does not exist apply in this case and concludes that they do not. T determines
that the financing component is significant because the difference between
the cumulative cash selling price of 5,040 and the financed amounts of 4,200 is
840, or approximately 20% of the financed amount. Therefore, an adjustment to
reflect the time value of money will be needed if C elects option (b) to pay at the
beginning of the contract.
T evaluates whether the implied discount rate of 13% is consistent with
the market rate of interest for companies with the same credit rating as its
own. Assuming that it is, T recognises revenue of 5,040 rateably over the
contract term as the performance obligation is satisfied and interest expense
of 840 using the effective interest method. The amount of interest expense
to recognise each period is based on the projected contract liability, which
decreases as services are provided and increases for the accrual of interest.
Below is one example interest calculation under the effective interest method.
Contract Transaction Interest expense Contract

liability – price/ at 1.083% liability
beginning delivery of (monthly rate – – end of
Period of month service 13% / 12) month
A B (A - B) × 1.083% = C A-B+C
1 4,200 140 44 4,104
2 4,104 140 43 4,007
3 4,007 140 42 3,909
4 3,909 140 41 3,810
5 3,810 140 40 3,710
Continue for each period…
36 140 140 - -
If, in this example, the implied discount rate of 13% were determined to be an
above-market rate, then the transaction price would be adjusted to reflect a
market rate, based on T’s credit-worthiness. The difference between the implied
discount rate and the market rate would represent a discount granted to the
customer for purposes other than financing. For an illustration of a scenario with
a below-market rate, see Example 16.

significant financing component: Payment in arrears
Manufacturer B enters into a contract to provide equipment to Customer C

priced at 2 million. C is a start-up entity with limited cash and B agrees that C
will pay for the equipment over two years by monthly instalments of 92,000.
The contract includes a financing component. The difference in pricing
between the selling price of 2 million and the total of the monthly payments
of 2.208 million (24 × 92,000) indicates that the contractual payment terms
have the primary purpose of providing C with financing. The cash selling price
is 2 million because it reflects the amount due at the point the equipment is
transferred to C. A comparison of the cash selling price and the total payments
to be received indicates total cumulative interest of 208,000 and an implied
interest rate of 9.7%.
B considers whether factors indicating that a significant financing component

does not exist apply in this case and concludes that they do not. B determines
that the financing component is significant because the difference between
the cash selling price of 2 million and the total promised consideration of
2.208 million is 208,000, or approximately 10% of the financed amount.
Therefore, an adjustment to reflect the time value of money is needed.
B evaluates whether the implied interest rate of 9.7% is consistent with
the market rate of interest for companies with the same credit-standing as
C. Assuming that it is, B recognises revenue of 2 million on delivery of the
equipment – i.e. as the performance obligation is satisfied – and interest income
on a monthly basis using the effective interest method. The amount of interest
income for each month is based on the balance of the receivable for equipment
sold, which decreases as payments are received.
Below is one example interest calculation under the effective interest method.
Interest
Monthly income
Receivable payment at 0.81% Receivable
– beginning – end of (monthly rate – – end of
Period of month month 9.7% / 12) month
A B A × 0.81% = C A-B+C
1 2,000,000 92,000 16,143 1,924,143
2 1,924,143 92,000 15,531 1,847,674
3 1,847,674 92,000 14,913 1,770,587
4 1,770,587 92,000 14,291 1,692,878
5 1,692,878 92,000 13,664 1,614,542
Continue for each period…
24 91,263 92,000 737 -
If, in this example, the implied interest rate of 9.7% were determined to be
a below-market rate, then the transaction price would be adjusted to reflect
a market rate, based on C’s credit-worthiness. The difference between the
implied interest rate and the market rate would represent a discount granted to
the customer for purposes other than financing. For an illustration of a scenario
with an above-market rate, see Example 15 in this chapter.
Assessment is undertaken at the individual contract level
IFRS 15.BC234 An entity determines the significance of the financing component at an

individual contract level, rather than at a portfolio level. The individual contract
level for a particular customer could consist of more than one contract if
the contract combination criteria in the standard are met. In developing the
standard, the International Accounting Standards Board (the Board) noted that
it would be unduly burdensome to require an entity to account for a financing
component if the effects of the financing component are not material to the
individual contract but the combined effects for a portfolio of similar contracts
would be material to the entity as a whole. An entity should apply judgement in
evaluating whether a financing component is significant to the contract.
No significant financing component if the timing of transfer of

goods or services is at the customer’s discretion
IFRS 15.BC233(a) Customers pay for some types of goods or services in advance – e.g. prepaid
phone cards, gift cards and customer loyalty points – and the transfer of the
related goods or services to the customer is at the customer’s discretion. In
these cases, the contracts do not include a significant financing component,
because the payment term does not relate to a financing arrangement.
Also, without this specific guidance the costs of requiring an entity to
account for the financing component in these situations would outweigh any
perceived benefits, because the entity could not know – and would therefore
have to continually estimate – when the goods or services will transfer to
the customer.
Contracts with a payment scheduled for part-way through

the performance period may contain a significant financing
component
Under some long-term contracts for which revenue is recognised over time, the
payment of the promised consideration may be scheduled for part-way through
the performance period – e.g. under a 26-month construction contract the
promised consideration is to be paid in full at the end of Month 13. It appears
that in these cases, a significant financing component may exist. We believe
that an entity should assess the contract as a whole and exercise judgement in
determining whether the financing component is significant.
Contracts with material right may contain a significant financing

component
IFRS 15.62(a) Contracts under which a customer pays for goods or services in advance and
has discretion over the timing of their transfer do not contain a significant
financing component. This may be relevant to contracts with a material right
if a customer chooses when to exercise that right. However, in some cases
the customer may not have that discretion. In these cases, the contract may
contain a significant financing component. The assessment of whether a
customer has discretion over the timing of the exercise of the material right may
require judgement.
Limited examples in the standard of when payments have a

primary purpose other than financing
IFRS 15.BC233(c) Determining whether a difference between the amount of promised

consideration and the cash selling price of the goods or services arises for
reasons other than the provision of finance requires judgement. An entity
considers all relevant facts and circumstances, including whether the difference
is proportionate to any other reason provided. Also, it may be more common
for the difference to be for a reason other than financing when payments are
received in advance of the delivery of goods or services.
IFRS 15.IE141–IE142 In some circumstances, a payment in advance or arrears on terms that are
typical for the industry and jurisdiction may have a primary purpose other than
financing. For example, a customer may withhold an amount of consideration
that is payable only on successful completion of the contract or the
achievement of a specified milestone. The primary purpose of these payment
terms, as illustrated in Example 27 of the standard, may be to provide the
customer with assurance that the entity will perform its obligations under the
contract, rather than provide financing to the customer.
Accounting for long-term and multiple-element arrangements

with a significant financing component may be complex
Determining the effect of the time value of money for a contract with a
significant financing component can be complex for long-term or multiple-
element arrangements. In these contracts:
– goods or services are transferred at various points in time;
– cash payments are made throughout the contract; and
– there may be a change in the estimated timing of the transfer of goods or
services to the customer.
If additional variable elements are present in the contract – e.g. contingent

consideration – then these calculations can be even more sophisticated,
involving significant cost and complexity for preparers.
In addition, an entity needs to have appropriate processes and internal controls
to handle these potential complexities in assessing whether a significant
financing component exists and, if so, developing the appropriate calculations
and estimates.
Using an interest rate that is explicitly specified in the contract

may not be appropriate
IFRS 15.BC239–BC241 It may not be appropriate to use an interest rate that is explicitly specified in the
contract, because the entity might offer below-market financing as a marketing
incentive. Consequently, an entity applies the rate that would be used in a
separate financing transaction between the entity and its customer that does
not involve the provision of goods or services.
This can lead to practical difficulties for entities with large volumes of customer
contracts and/or multinational operations, because they will have to determine
a specific discount rate for each customer, class of customer or geographical
region of customer.
Interest income recognised from a significant financing

component may be presented as ‘revenue’ but not ‘revenue from
contracts with customers’
IFRS 15.65, BC246–BC247 An entity that regularly enters into contracts with customers that include
financing components may earn interest income in the course of its ordinary
activities. If so, then it may present interest income arising from a significant
financing component as a type of revenue in the statement of profit or loss.
However, this interest income has to be presented separately from revenue
from contracts with customers.
Advance payments may affect EBITDA
When an entity receives an advance payment that includes a significant

financing component, it increases the amount of revenue recognised, with
a corresponding increase in interest expense. This results in an increase in
earnings before interest, taxes, depreciation and amortisation (EBITDA), which
may affect compensation and other contractual arrangements.
Application of the practical expedient to a contract with multiple

performance obligations
In a contract with two or more performance obligations, identifying the period

between customer payment and the transfer of goods or services may present
challenges, especially when the performance obligations are satisfied at
different points in time and consideration is paid over time or all at once.
In some contracts that include consideration paid over time, one performance
obligation is completed in the early stages of a contract, whereas a second
performance obligation continues for an extended period of time. In
these cases, the entity generally allocates each payment received to both
performance obligations in the contract on a pro rata basis to calculate the
financing component and determine whether the practical expedient applies
(rather than allocating payments to a single performance obligation until it has
been fully paid, as would be the case with a first-in, first-out (FIFO) allocation).
In other contracts, consideration includes an up-front payment and performance
obligations are completed consecutively over time. An entity evaluates all
relevant evidence, including termination clauses, to determine whether
it is appropriate for an up-front cash payment to be allocated to the first
performance obligation when determining whether the practical expedient can
be applied at the contract level.
A contract with an implied interest rate of zero may contain a

financing component
When the consideration to be received for a good or service with extended

payment terms is the same as the cash selling price, the implied interest rate is
zero. However, a significant financing component may still exist.
For example, retailers sometimes offer a promotional incentive that allows
customers to buy items such as furniture and pay the cash selling price two
years after delivery. Judgement is required to evaluate whether in these
circumstances an entity is offering a discount or other promotional incentive
for customers who pay the cash selling price at the end of the promotional
period equal to the financing charge that would otherwise have been charged in
exchange for financing the purchase.
If the entity concludes that financing has been provided to the customer, then
the transaction price is reduced by the implicit financing amount and interest
income is accreted. The implicit financing amount is calculated using the rate
that would be used in a separate financing transaction between the entity and
its customer.
Interest accrued on a contract liability is a borrowing cost eligible

for capitalisation
IFRS 15.60, BC229–BC230 If an entity accrues interest on a contract liability that represents advance
consideration received under a contract with a customer, then in our view
this interest meets the definition of borrowing costs because the interest
represents the cost to the entity of borrowing funds from its customer. To the
extent that the other criteria in the borrowing costs standard are met, this
interest should be capitalised.

significant financing component: Advance payment and fixed
delivery
Carmaker M submits a purchase order to Automotive Supplier P for the

delivery of 10,000 parts over five years for a fixed price of 1 million. Under the
contract, M will pay the full amount in advance. The contract also contains
a predetermined delivery schedule for the parts. P has determined that if it
received a loan for a similar amount, to be repaid over five years, then the loan
would bear interest of 5%.
P determines that the contract includes a significant financing component,
owing to the five-year period between the prepayment and the delivery date of
the last part and the 5% interest rate. P does not identify any indicators that the
deferred terms are for reasons other than financing.

significant financing component: Advance payment and delivery at
customer’s discretion
Carmaker M enters into a framework agreement with Automotive Supplier D.

In the framework agreement, M commits to a minimum quantity of 10,000
parts to be delivered over five years. However, the timing of delivery is fully at
M’s discretion. M agrees to prepay 1 million for the first 10,000 parts. Purchase
orders for additional parts will be paid for at the time of delivery.
D concludes that the framework agreement does not contain a significant
financing component, because even though M has paid for 10,000 parts in
advance, the timing of the transfer of the parts is at M’s discretion.

significant financing component: Fixed vs variable payment
Media Company M enters into an arrangement with Television Company C.

Under the arrangement, C receives rights to show a film five times per year for
the next five years. C will pay M a fixed amount of 1,000 per year.
M concludes that the licence is a single right-to-use licence and recognises
revenue when the copy of the content is transferred to C on commencement of
the licence period.
M evaluates whether the arrangement includes a significant financing
component. As part of its analysis, M determines that it would provide finance
to C in a separate transaction at 6%.
M concludes that the arrangement includes a significant financing component
because of the period between performance and payment and the rate that
would be applied in a separate financing transaction. M does not identify any
reasons other than financing for the difference between timing and payment.
Therefore, M adjusts the transaction price for the effect of the significant
financing component.
Conversely, if the consideration under the contract were entirely variable – e.g.
based on viewer levels when the film is televised – then the arrangement would
not include a significant financing component. This is because the standard
states that when a substantial amount of the consideration is variable, the
arrangement does not include a significant financing component.

significant financing component: Instalment payments throughout
the contract period
Shipbuilder B enters into a contract with Customer C to build a ship for a

fixed price of 1 million. Under the contract, C will pay the amount in monthly
instalments throughout the expected production period of three years. B
determines that it would apply a rate of 3% if it were to enter into a separate
financing transaction with C. It also determines that revenue will be recognised
over time, because it has no alternative use for the ship under construction and
also has a right to payment for it.
B elects to apply the practical expedient and not account for a significant
financing component when the period between performance and payment is
12 months or less.
B determines that the practical expedient applies to the contract because it
expects the instalment payments to broadly align with performance throughout
the period. Accordingly, the period between performance and payment is never
more than 12 months.

significant financing component: Payment in arrears and an over-
time contract
Developer D buys land and obtains approval to develop a retail centre. D then
enters into a contract with Company V, a large listed property company, to sell
the land and retail centre for a fixed price of 1 million. Under the contract, V will
pay the full amount on completion of construction, which is expected to be in
five years’ time. D has also determined that it would apply a rate of 5% if it were
to enter into a separate financing transaction with V.
D determines that revenue will be recognised over time and that the contract
includes a significant financing component, owing to the five-year period
between performance and payment and the 5% interest rate. D does
not identify any indicators that the deferred terms are for reasons other
than financing.

significant financing component: Financing component is not
significant
Telco R enters into a contract with Customer S for a two-year wireless service
plan at 85 per month (the stand-alone selling price is 65 per month). In the
same contract, S buys a handset for 130 (the stand-alone selling price is 630). R
determines that the contract term for accounting purposes is two years.
The transaction price and stand-alone selling prices in the contract are
summarised as follows.
Transaction Stand-alone
price selling price
Wireless service 2,040 1,560

(85 × 24 months) (65 × 24 months)
Handset 130 630
Total 2,170 2,190
There is a difference in timing between performance and payment because

the handset is delivered on day one and payment for at least a portion of
that handset occurs over 24 months. Consequently, the contract includes a
financing transaction.
However, because there is an overall discount on the bundle (2,170 transaction
price vs 2,190 stand-alone selling price), R needs to allocate that discount
before determining whether the financing component is significant. This is
because it is necessary to determine the cash flows that relate specifically to
the handset. To allocate the discount, R allocates the transaction price based on
relative stand-alone selling prices (see 4.2.1). This results in an allocation of 624
to the handset and 1,546 to the wireless service.
The contract does not specify an interest rate. R concludes that 7% reflects
the rate that would be used by R and S in a separate financing transaction. R
then calculates the present value of the payment stream related to the handset
(i.e. 624 less 130 repaid over 24 months) using the discount rate of 7%, which
results in an imputed interest component of 33. The relative value of the
financing component of 33, compared with the total contract price, is less than
2%. Based on its assessment of all relevant qualitative and quantitative factors,
R concludes that a financing component that represents less than 2% of the
contract is not significant and does not account for a financing component in
this contract.

significant financing component: No adjustment for the financing
component
Telco T enters into a one-month wireless contract with Customer C that includes
voice and data services and a handset. The monthly service fee represents the
price charged to customers that bring their own device (i.e. it is the stand-alone
selling price of the service).
C makes no up-front payment for the phone but will pay its stand-alone selling
price by monthly instalments over 24 months. There is no additional interest
charge for the financing. Full repayment of the remaining balance of the phone
becomes due if C fails to renew the monthly service contract. There is no other
amount due if C does not renew.
T determines that the term of the contract is one month. T then needs to assess
whether the instalment plan on the handset conveys a significant financing
component to the customer.
In making this assessment, T observes that instalment payments are due
immediately if the service contract is not renewed. Thinking about this
conditionality and the contract term together, T may conclude that either
the financing component may not be significant or the practical expedient
applies. In these cases, T would not adjust the transaction price for the
financing component. T also needs to consider the applicable financial
instrument guidance in the measurement of any receivable resulting from the
instalment plan.
3.3 Non-cash consideration

IFRS 15.66–67 Non-cash consideration received from a customer is measured at fair value. If an
entity cannot make a reasonable estimate of the fair value, then it refers to the
estimated selling price of the promised goods or services.
IFRS 15.68 Estimates of the fair value of non-cash consideration may vary. Although this may
be due to the occurrence or non-occurrence of a future event, it can also vary due to
the form of the consideration – e.g. variations due to changes in the price per share
if the non-cash consideration is an equity instrument.
When the fair value of non-cash consideration varies for reasons other than the form
of the consideration, those changes are reflected in the transaction price and are
subject to the guidance on constraining variable consideration.
IFRS 15.69 Non-cash consideration received from the customer to facilitate an entity’s
fulfilment of the contract – e.g. materials or equipment – is accounted for if and
when the entity obtains control of those contributed goods or services.
IFRS 15.126, IE156–158, BC254A–BC254G The standard does not provide specific guidance on the measurement date for
non-cash consideration. It appears that an entity should apply judgement, based
on the relevant facts and circumstances, to determine whether to measure non-
cash consideration with reference to the date on which the contract is entered
into, the date the non-cash consideration is received or the date the performance
obligation is satisfied. Changes in the fair value of non-cash consideration after the
measurement date are not included in the transaction price.
Example 24 – Non-cash consideration: Measured at contract

inception
Real Estate Developer D enters into a contract with Customer C to build an

office block on C’s land. As consideration, D will receive 50,000 in quarterly
instalments as construction progresses and a piece of C’s land adjacent to the
construction site. The land title transfers to D up-front, but it is subject to recall if
D defaults and does not complete the office block.
In this scenario, D determines that it is appropriate to measure the non-cash
consideration at the date of contract inception.
3.3 Non-cash consideration |
Example 25 – Non-cash consideration: Measured when the

performance obligation is satisfied
Real Estate Developer R enters into a contract with Customer M for the sale
of a unit in a new retirement village. The project is scheduled to take three
years. Under the contract, R will receive an up-front payment of 20,000 and M’s
existing house on completion of the unit. M retains all of the rights to occupy
and pledge the house until the unit in the new retirement village is ready. R
concludes that control over the unit transfers to M at the point in time when
construction is completed.
In this scenario, R determines that it is appropriate to measure the non-cash
consideration at the date when it satisfies the performance obligation.
Example 26 – Non-cash consideration: Free advertising
Production Company Y sells a television show to Television Company X. The

consideration under the arrangement is a fixed amount of 1,000 and 100
advertising slots. Y determines that the stand-alone selling price of the show
would be 1,500. Based on market rates, Y determines that the fair value of the
advertising slots is 600.
Y determines that the transaction price is 1,600, comprising the 1,000 fixed
amount plus the fair value of the advertising slots.
If the fair value of the advertising slots could not be reasonably estimated, then
the transaction price would be 1,500 – i.e. Y would use the stand-alone selling
price of the goods or services promised for the non-cash consideration in these
circumstances.
Constraint does not apply when variation is due to the form of

non-cash consideration
IFRS 15.BC251–BC252 The requirement to constrain estimates of variable consideration applies

regardless of whether the amount received will be cash or non-cash
consideration. Therefore, variability in the estimate of the fair value of non-
cash consideration is constrained if that variability relates to changes in the fair
value for reasons other than the form of the consideration – i.e. changes other
than the price of the non-cash consideration. If the variability is because of the
entity’s performance – e.g. a non-cash performance bonus – then the constraint
applies. If the variability is because of the form of the non-cash consideration
– e.g. changes in the stock price – then the constraint does not apply and the
transaction price is not adjusted.
The determination of whether a change in fair value was caused by the form of
the non-cash consideration or other reasons, and the determination of how to
allocate fair value changes between those affecting transaction price and those
that do not, may be challenging in some situations.
Transfers of assets from customers
In certain industries, it is common for entities to receive transfers of property,

plant and equipment (or cash to acquire it) from their customers in return for a
network connection and/or an ongoing supply of goods or services.
The nature of these arrangements can vary widely. In some arrangements, the
party that transfers the assets (the transferor) is the party that receives access
to a supply of goods or services (the ultimate customer). In other arrangements,
the transferor is not the ultimate customer or is the ultimate customer for only
a short period of time. For example, a property developer builds a residential
complex in an area that is not connected to the water mains. To connect to the
water mains, the property developer is required to install a network of pipes and
to transfer them to the water supply company, which will supply future services
to the residents of the complex.
An entity that receives such contributed assets evaluates all relevant facts and
circumstances to determine the appropriate accounting, including whether the
contribution is part of a contract with a customer in the scope of the standard
(see Chapter 6). If the contract is in the scope of the standard, then the entity
determines whether:
– the connection to the supply of future services transfers a distinct good or
service to the customer (see Chapter 2); and
– the contributed assets are non-cash consideration to be included in the
transaction price.
An entity considers all of its obligations under the contract to determine the
appropriate timing of revenue recognition.
Barter transactions involving advertising services
The standard does not contain any specific guidance on the accounting for
barter transactions involving advertising services; therefore, the general
principles for measuring consideration apply.
3.4 Consideration payable to a customer |
3.4 Consideration payable to a customer

IFRS 15.70 Consideration payable to a customer includes cash amounts that an entity pays or
expects to pay to the customer or to other parties that purchase the entity’s goods
or services from the customer. Consideration payable to a customer also includes
credits or other items – e.g. a coupon or voucher – that can be applied by the
customer against the amount owed to the entity or to other parties that purchase
the entity’s goods or services from the customer.
An entity evaluates the consideration payable to a customer to determine whether
the amount represents a reduction of the transaction price, a payment for distinct
goods or services or a combination of the two.
IFRS 15.71 If the entity cannot reasonably estimate the fair value of the good or service
received from the customer, then it accounts for all of the consideration payable to
the customer as a reduction in the transaction price.
IFRS 15.70–72
Does the consideration payable to a customer (or to the customer’s
customer) represent a payment for a distinct good or service?
Yes No
Can the entity reasonably No Consideration payable

estimate the fair value of the good is accounted for as
or service received? a reduction in the
transaction price and
Yes recognised at the later
of when:
Does the consideration payable the entity recognises
exceed the fair value of the distinct revenue for the
good or service? transfer of the related
Yes No goods or services
the entity pays or
promises to pay the
Excess of consideration Consideration consideration (which
payable is accounted for payable might also be implied)
as a reduction in the is accounted for
transaction price as a purchase
Remainder is accounted from suppliers
for as a purchase from
suppliers
Example 27 – Payments to customers: Reduction in the transaction

price
IFRS 15.IE160–IE162 Consumer Goods Manufacturer M enters into a one-year contract with
Retailer R to sell goods. R commits to buying at least 1,500 worth of the
products during the year. M also makes a non-refundable payment of 15 to R at
contract inception to compensate R for the changes that it needs to make to its
shelving to accommodate M’s products.
M concludes that the payment to R is not in exchange for a distinct good
or service, because M does not obtain control of the rights to the shelves.
Consequently, M determines that the payment of 15 is a reduction in the
transaction price. M accounts for the consideration paid as a reduction in the
transaction price when it recognises revenue for the transfer of the goods.
Example 28 – Payments to customers: Variable consideration
Company C contracts with Retailer X and delivers goods on 15 December Year 1.

On 20 January Year 2, C offers coupons in a newspaper to encourage retail sales
of the goods sold to X. C agrees to reimburse X for coupons redeemed.
C has offered similar coupons in previous years.
C would probably determine that the transaction price for the goods sold on
15 December Year 1 included variable consideration, given its history of offering
coupons.
Conversely, if C had not offered coupons in prior years and did not expect to
offer any coupons at contract inception, then it would recognise the amount
payable to X as an adjustment to revenue when it communicated to X its
intention to reimburse X for any redeemed coupons.
Payments to distributors and retailers may be for distinct goods

or services
Consumer goods companies often make payments to their distributors and

retailers. In some cases, the payments are for identifiable goods or services
– e.g. co-branded advertising. In these cases, the goods or services provided
by the customer may be distinct from the customer’s purchase of the seller’s
products.
If the entity cannot estimate the fair value of the good or service received from
the customer, then it recognises the payments as a reduction in the transaction
price. If the payments to customers exceed the fair value of the good or service
provided, then any excess is a reduction in the transaction price.
Slotting fees
Slotting fees are payments made by an entity to a retailer for product placement
in the retailer’s store. Judgement is required to determine whether slotting fees
are:
– paid in exchange for a distinct good or service that an entity receives from the
customer: these are recognised as a purchase from the supplier – i.e. as a
prepayment or an expense; or
– sales incentives granted by the entity: these are recognised as a reduction in
the transaction price.
When making this judgement, an entity carefully considers its particular facts
and circumstances.
Nomination fees
In some cases, an entity makes non-refundable up-front payments to a

customer before a contract exists. For example, an entity may make a payment
to a customer under, or in conjunction with entering into, a framework
agreement. The nature of these payments is evaluated based on the specific
facts and circumstances. It appears that if such a payment meets the definition
of an asset, then it may be capitalised and amortised as a reduction in revenue
over the expected purchases or service period (including renewals) to which it
relates (see Section 7.3).
When determining the appropriate accounting for an up-front payment, factors
to consider may include:
– the underlying reason for the payment;
– whether the payment is recoverable: e.g. if an exclusive relationship is
secured and it is probable that the customer will make sufficient purchases
to recover the payment; and
– the history of renewals and the average project life, which usually indicate
whether the expected initial contract will be obtained and whether the
payment will be recovered through the initial contract or anticipated renewals.
We believe that the entity should assess the recoverability of the capitalised
payments at each reporting date. This assessment should generally be based on
the expected future cash flows from the customer.
Scope of consideration payable to a customer is wider than

payments made under the contract
Payments made to a customer that are not specified in the contract may still
represent consideration payable to a customer. An entity needs to develop a
process for evaluating whether any other payments made to a customer are
consideration payable that requires further evaluation under the standard.
The determination of how broadly payments within a distribution chain should
be evaluated requires judgement. However, an entity need not always identify
and assess all amounts ever paid to a customer to determine whether they
represent consideration payable to a customer.
Consideration payable may include payments made outside a

direct distribution chain
IFRS 15.70, BC92, BC255 Consideration payable to a customer includes amounts paid to a customer’s
customer – i.e. amounts paid to end customers in a direct distribution chain.
However, in some cases an entity may conclude that it is appropriate to apply the
guidance more broadly – i.e. to amounts paid outside the direct distribution chain.
For example, Marketing Company M may market and incentivise the purchase
of Merchant P’s products by providing coupons to P’s Buyer B. When B buys
from P as a result of M’s actions, M earns revenue from P. B is not purchasing
M’s services and is not in a direct distribution chain.
Service fee based on number of units sold by Merchant P
Merchant P
(Principal)
Marketing
Products Company M
(agent)
Buyer B Coupons
(P’s customer)
Depending on the facts and circumstances, M may conclude that both P

and B are its customers, or it may conclude that only P is its customer. As a
consequence, judgement will be needed to evaluate a specific fact pattern
to determine whether a payment to a party outside a direct distribution chain
should be treated as consideration payable to a customer and therefore as a
reduction of revenue.
Amounts payable to a customer may be either variable

consideration or consideration payable to a customer
The standard states that consideration payable to a customer includes amounts

that an entity pays or expects to pay to a customer or to other parties that
purchase the entity’s goods or services from the customer. The guidance on
consideration payable to a customer states that it is recognised at the later
of when the entity recognises revenue or when the entity pays or promises
to pay the consideration. However, because consideration payable to a
customer can be included in the transaction price, it can also be a form of
Variable consideration is estimated and included in the transaction price at
contract inception, and remeasured at each subsequent financial reporting date.
This is different from the guidance on when to recognise consideration payable
to a customer.
This discrepancy puts pressure on the determination, at contract inception,
of whether the entity intends to provide an incentive or the customer has a
reasonable expectation that an incentive will be provided.
This evaluation includes an assessment of the entity’s past practice and other
activities that could give rise to an expectation at contract inception that the
transaction price includes a variable component. The consideration payable to
a customer guidance is used only when an entity has not promised a payment
to the customer at contract inception, either implicitly (including through its
customary business practice) or explicitly.
Example 29 – Payments to customers: Goodwill credits
Customer C has a two-year network service contract with Telco T. In Month 6, T

experiences two days of service quality issues. Past experience indicates that
service quality issues are infrequent for T.
In Month 7, C receives a bill of 100 for Month 6 services. On receiving the bill,
C calls T and requests a credit for the service outage. Although it is not its usual
practice, T grants C a credit of 5.
Because the credit can be applied against amounts owed to T, it is accounted for
as consideration payable to the customer. And, because the payment is not in
exchange for a distinct good or service, the consideration is accounted for as a
reduction in the transaction price.
Example 30 – Payments to customers: Credits to a new customer
Customer C is in the middle of a two-year contract with Telco B, its current

wireless service provider, and would be required to pay an early termination
penalty if it terminated the contract today.
If C cancels the existing contract with B and signs a two-year contract with Telco
D for 80 per month, then D promises at contract inception to give C a one-time
credit of 200 (referred to as a ‘port-in credit’). The amount of the port-in credit
does not depend on the volume of service subsequently purchased by C during
the two-year contract.
D determines that it should account for the port-in credit as consideration
payable to a customer. This is because the credit will be applied against
amounts owing to D. Because D does not receive any distinct goods or services
in exchange for this credit, it will account for it as a reduction in the transaction
price (i.e. 80 × 24 - 200). D will recognise the reduction in the transaction price
as the promised goods or services are transferred.
Example 31 – Payments to customers: Consideration paid to a

customer’s customer
Supplier X enters into a contract with Supplier Y to sell components worth 1,500
during the year as a subcontractor. The contract is in the scope of the standard.
Y will then integrate these components into parts that it sells to Carmaker Z.
As part of the arrangement, X has agreed to pay a one-off administrative fee of
15 to Z so that it can be added to Z’s list of suppliers.
Supplier X
(components)
Fee Components
Carmarker Z Final product

Supplier Y’s (parts)
(Supplier Y’s customer)
X notes that Z is the end customer in a distribution chain that includes Y.

Therefore, payments to Z may be considered as consideration payable to a
customer.
X concludes that the payment to Z is not in exchange for a distinct good or
service. Consequently, X determines that the payment of 15 is a reduction in
the transaction price, which it recognises as a reduction in the revenue earned
as it transfers the promised components to Y.
Example 32 – Payments to customers: Payment on entering into a

new framework agreement
Supplier S makes a non-refundable up-front payment of 1 million to Customer

C as part of the negotiations for a three-year framework agreement to supply
specialised parts to C exclusively. The parts will be assembled into C’s main
product, which has been successful in the market. C has been a customer of S
for many years and S has been able to provide reliable forecasts of the results of
its projects with C.
The framework agreement stipulates a price of 100 per part. C provides a
non-binding projection of its supply requirements, which forecasts probable
purchases of 100,000 parts over the three years (for a total of 10 million). S’s
profit margin on these parts is 20%. However, there is no enforceable contract
until C submits a purchase order.
S considers the following factors to evaluate the accounting for the 1 million
up-front payment to C.
– S has secured an exclusivity agreement with C.
– S has a long history of doing business with C that is used as a basis for
forecasting C’s future purchases.
– The payment is expected to be recoverable from probable future purchases
that will earn S a margin of 2 million (10 million × 20% profit margin).
– The primary purpose of the fee is to secure an exclusive relationship with C
and these transactions are common in the industry.
Based on its overall evaluation of these factors, S concludes that the payment
should be capitalised and amortised as a reduction in revenue over the
anticipated future purchases.
Example 33 – Payments to customers: New product for a new

customer
Supplier S enters into a framework agreement with Carmaker B to supply a

specialised component as part of a new product that B is developing. Supplying
the part will require extensive pre-production engineering activities, for which S
will be paid only if the development process succeeds. B does not commit to a
minimum quantity of parts before S produces the first prototype. Because this
is a new product, S does not have historical experience with it.
As part of the arrangement, S pays a non-refundable up-front fee to B of 100,000.
When determining how to account for the payment to B, S notes that it:
– cannot reasonably estimate whether the development process will be
successful and therefore whether it will receive payment for this activity;
– has no contract for a minimum quantity of parts; and
– lacks historical experience with the new product. The uncertainty over the
pre-production engineering activities indicates that the payment may not be
recoverable through future purchases.
On evaluating these factors, S concludes that this up-front payment does not
represent an asset. Therefore, it accounts for the payment in profit or loss when
it is obliged to make the payment.
Example 34 – Payments to customers: Volume rebates
Media Company M provides advertising space to companies on its internet

platform. M enters into a contract with Advertising Agency B for the referral of
B’s customers to M. Under the contract, B is entitled to a commission of 10%
of M’s billings for the use of its advertising space by B’s customers. To secure its
market share, M also agrees to pay a volume rebate directly to B’s customers
(i.e. the end users of the advertising space) if certain advertising volumes are
met during an annual period.
M considers that it does not receive any distinct good or service in exchange
for the payment of volume rebates to B’s customers and therefore accounts for
them as a reduction in revenue. M’s accounting for these volume rebates is not
impacted by its assessment of whether they are consideration payable to its
customer or its customer’s customer.
3.5 Sales taxes

IFRS 15.47, BC188B Revenue does not include amounts collected on behalf of tax authorities – e.g.
some sales taxes, excise duties or value added taxes (VAT). The amount of taxes
or duties may be computed as a percentage of either the selling price or the
production cost.
To determine how to account for sales taxes or duties, an entity assesses whether
it is primarily obligated for payment of the taxes or whether it collects the amount
from the customer on behalf of the tax authorities. This determination is made
based on an analysis of the local regulatory requirements.
3.5 Sales taxes |
The accounting for sales or excise duties may vary depending on the different tax
regimes in various jurisdictions. This might lead to different accounting for different
sales or excise duties by entities within a multinational group. Depending on how
the legal or regulatory requirements are applied, the determination of whether
an entity is primarily responsible for the tax may require significant judgement.
It appears that if excise taxes are significant, then the entity should disclose the
judgements made and the line item(s) in which amounts are included, if applicable.
Example 35 – Sales taxes: Gross accounting for excise duties
Excise duties may be determined based on production levels and are payable
to the authorities regardless of whether goods are sold – i.e. the tax payments
are not refunded by the authorities if the goods are not sold. It appears that
in these cases the seller is primarily responsible for the tax and it is another
production cost to be recovered in the pricing of the goods. Accordingly, it does
not collect the tax from the customer on behalf of the tax authorities and the
transaction price should be determined on a gross basis, including the excise
duties recouped from customers. As a result, any excise duties received from
a customer should be included in the revenue line item and any excise duties
incurred should be included in the ‘cost of goods sold’ line item.
Example 36 – Sales taxes: Net accounting for excise duties
Excise duties may be recouped from the authorities if the buyer defaults. It
appears that in these cases the seller is likely to be collecting the tax from the
customer on behalf of the tax authorities because it is not primarily responsible
for the tax and does not bear any risk. Under this approach, the amount of
excise tax should be excluded from revenue and amounts collected should be
reported as a liability.
Example 37 – Sales taxes: Gross accounting for export taxes
The tax authorities in Country X impose an export tax on certain commodities

sold to overseas customers; an entity cannot reclaim the tax if the customer
defaults. It appears that this example is similar to Example 35 in this chapter
– i.e. the seller is primarily obligated for payment of the taxes, rather than
collecting the amounts on behalf of the tax authorities. Therefore, the
transaction price is determined on a gross basis, including any export tax
recouped from customers. As a result, the export tax is included in the revenue
line item and export tax incurred is included in expenses or ‘cost of goods sold’.
4 Step 4 – Allocate the

transaction price to
the performance
obligations in the
contract
Overview
IFRS 15.73, 75 The transaction price is allocated to each performance obligation – generally
each distinct good or service – to depict the amount of consideration to which
an entity expects to be entitled in exchange for transferring the promised goods
or services to the customer.
IFRS 15.74 An entity generally allocates the transaction price to each performance
obligation in proportion to its stand-alone selling price. However, when specified
criteria are met a discount or variable consideration is allocated to one or more,
but not all, performance obligations.
IFRS 15.76 This step of the revenue model comprises two sub-steps that an entity
performs at contract inception.
Determine stand-alone Allocate the

selling prices transaction price
(see Section 4.1) (see Section 4.2)
4 Step 4 – Allocate the transaction price to the performance obligations in the contract | 91
4.1 Determine stand-alone selling prices |
4.1 Determine stand-alone selling prices

IFRS 15.77 The ‘stand-alone selling price’ is the price at which an entity would sell a promised
good or service separately to a customer. The best evidence of this is an observable
price from stand-alone sales of the good or service to similarly situated customers.
A contractually stated price or list price may be the stand-alone selling price of that
good or service, but this is not presumed to be the case.
IFRS 15.78 If the stand-alone selling price is not directly observable, then the entity estimates
the amount using a suitable method (see 4.1.1) as illustrated below. In limited
circumstances, an entity may estimate the amount using the residual approach
(see 4.1.2).
IFRS 15.79
Allocate based on relative stand-alone selling prices
Performance obligation 1 Performance obligation 2 Performance obligation 3
Determine stand-alone selling prices
Is an observable price available?
Yes No
Use the observable price Estimate price
Adjusted Residual
Expected cost
market approach
plus a margin
assessment (only in limited
approach
approach circumstances)
The standard does not contain a reliability threshold
Under the standard, the stand-alone selling price is determined at contract

inception for each performance obligation. There are no circumstances in which
revenue recognition is postponed because it is difficult to determine a stand-
alone selling price.
If an observable price is available, then it is used to determine the stand-alone
selling price; if not, then the entity is required to estimate the amount.
The standard does not require that the amount can be ‘reliably’ estimated, nor
does it prescribe another threshold. An entity is required to maximise the use
of observable inputs, but in all circumstances will need to arrive at a stand-alone
selling price and allocate the transaction price to each performance obligation in
the contract.
An entity will need to apply judgement when there are observable prices but
they are highly variable.
4.1.1 Estimating stand-alone selling prices

IFRS 15.78 An entity considers all information that is reasonably available when estimating
a stand-alone selling price – e.g. market conditions, entity-specific factors and
information about the customer or class of customer. It also maximises the use of
observable inputs and applies consistent methods to estimate the stand-alone selling
price of other goods or services with similar characteristics.
IFRS 15.79 The standard does not preclude or prescribe any particular method for estimating
the stand-alone selling price for a good or service when observable prices are not
available, but describes the following estimation methods as possible approaches.
Adjusted market Evaluate the market in which goods or services are sold
assessment and estimate the price that customers in the market
approach would be willing to pay
Expected cost Forecast the expected costs of satisfying a performance

plus a margin obligation and then add an appropriate margin for that
approach good or service
Residual Subtract the sum of the observable stand-alone selling

approach (limited prices of other goods or services promised in the
circumstances) contract from the total transaction price
IFRS 15.88 After contract inception, an entity does not reallocate the transaction price to reflect
subsequent changes in stand-alone selling prices. For a discussion of changes in a
transaction price as a result of a contract modification, see Section 8.2.
Judgement is often required to estimate stand-alone selling price
IFRS 15.BC269 Often, there is not an observable selling price for all of the goods or services in
a contract with a customer. As a result, significant judgement is often involved
in estimating a stand-alone selling price. To estimate stand-alone selling prices
of goods or services that are not typically sold separately, an entity needs to
develop processes with appropriate internal controls.
Reasonably available information that may be considered in developing these
processes might include:
– reasonably available data points: e.g. costs incurred to manufacture or
provide the good or service, profit margins, supporting documentation
to establish price lists, third party or industry pricing and contractually
stated prices;
– market conditions: e.g. market demand, competition, market constraints,

awareness of the product and market trends;
– entity-specific factors: e.g. pricing strategies and objectives, market share
and pricing practices for bundled arrangements; and
– information about the customer or class of customer: e.g. type of customer,
geography or distribution channels.
The following framework may be a useful tool for estimating and documenting
the stand-alone selling price and for establishing internal controls over the
estimation process.
Gather all reasonably available data points
Consider adjustments based on market conditions and entity-specific factors
Consider the need to stratify selling prices into meaningful groups
Weigh available information and make the best estimate
Establish processes for ongoing monitoring and evaluation
Estimated stand-alone selling prices for a particular good or service may change
over time due to changes in market conditions and entity-specific factors.
Although the estimated stand-alone selling prices for previously allocated
arrangements are not revised, new arrangements should reflect current
reasonably available information, including shifts in pricing, customer base or
product offerings.
The extent of the monitoring process and the frequency of necessary changes
in estimated stand-alone selling prices will vary based on the nature of the
performance obligations, the markets in which they are being sold and various
entity-specific factors. For example, a new product offering or sales in a new
geographic market may require more frequent updates to the estimated stand-
alone selling price as market awareness and demand change.
Single good or service may have more than one stand-alone

selling price
An entity may sell a similar good or service to different groups of customers at

different prices. In these cases, the good or service may have more than one
stand-alone selling price. Therefore, the entity may consider stratifying stand-
alone selling prices. The stratification could be based on customer type, volume of
sales to customers, geography, distribution channel or other relevant groupings.
If there is a range of observable prices, then a stated contract

price within the range may be an acceptable stand-alone selling
price
In some cases, an entity may sell a good or service separately for a range of
observable prices. When this is the case and the stated contract price is within
a sufficiently narrow range of observable selling prices, it may be appropriate
to use a stated contract price as the estimated stand-alone selling price of the
good or service.
To determine whether this is appropriate, the entity assesses whether an
allocation of the transaction price based on such an estimate would meet
the allocation objective (see Section 4.2). As part of this assessment, the
entity considers all information that is reasonably available (including market
conditions, entity-specific factors, information about the customer or class of
customer, how wide the range of observable selling prices is and where the
stated price falls within the observable range).
For example, Company D sells a licence plus post-contract customer support
(PCS) for 450. The stated price for PCS in the contract is 206. D regularly sells
the same PCS separately for observable prices ranging from 200 to 210. In this
example, the stated price is within a reasonably narrow range of observable
prices and, assuming that there are no other indicators that using the stated
price would not meet the allocation objective, it may be appropriate to conclude
that 206 is a reasonable estimate of the stand-alone selling price for the PCS
that can be used in determining how to allocate the contract consideration of
450 between the licence and PCS.
Using a range to estimate stand-alone selling prices
When estimating stand-alone selling prices, it may be acceptable to select

from a range of prices, particularly when stand-alone selling prices would be
expected to vary for similar types of customers. A range has to be narrow
and based on an analysis that maximises observable inputs and supports an
assertion that any price within that range would be a valid pricing point if the
performance obligation were sold on a stand-alone basis.
It would not be appropriate to establish a range by determining an estimated
stand-alone selling price and then arbitrarily adding a range of a certain
percentage on either side of the point estimate to create a reasonable range of
estimated selling prices.
4.1.2 Using the residual approach to estimate stand-alone

selling prices
IFRS 15.79(c) The residual approach is appropriate only if the stand-alone selling price of one or more
goods or services is highly variable or uncertain and observable stand-alone selling
prices can be established for the other goods or services promised in the contract.
Selling price is… If…
Highly variable The entity sells the same good or service to different
customers at or near the same time for a broad range
of prices
Uncertain The entity has not yet established the price for a good or
service and the good or service has not previously been
sold on a stand-alone basis
Under the residual approach, an entity estimates the stand-alone selling price of a
good or service on the basis of the difference between the total transaction price and
the observable stand-alone selling prices of other goods or services in the contract.
It appears that the total transaction price used in applying the residual approach
should include the estimated amount of any variable consideration before
applying the constraint (see Section 3.1). This approach is consistent with the
allocation objective because the estimated variable consideration is the amount of
consideration to which the entity expects to be entitled.
IFRS 15.80 If two or more goods or services in a contract have highly variable or uncertain
stand-alone selling prices, then an entity may need to use a combination of
methods to estimate the stand-alone selling prices of the performance obligations
in the contract. For example, an entity may use:
– the residual approach to estimate the aggregate stand-alone selling prices for all
of the promised goods or services with highly variable or uncertain stand-alone
selling prices; and then
– another technique to estimate the stand-alone selling prices of the individual
goods or services relative to the estimated aggregate stand-alone selling price
that was determined by the residual approach.
Example 1 – Estimating stand-alone selling price: Residual

approach
Software Vendor M enters into a contract with Customer C to provide rights to

use Licences S and T for three years, as well as PCS services for both licences.
The contract price is 100,000.
The PCS services comprise telephone technical support for each licence. M has
identified four performance obligations in the contract:
– Licence S;
– PCS services for S;
– Licence T; and
– PCS services for T.
The stand-alone observable price of 12,500 is available for the technical support
for each of the licences, based on renewals that are sold separately. However,
the prices at which M has sold licences similar to S and T have been in a broad
range of amounts – i.e. the selling prices of the licences are highly variable
and not directly observable. Also, the level of discounting in the bundled
arrangements varies based on negotiations with individual customers. M
estimates the stand-alone selling prices of the performance obligations in the
contract as follows.
Stand-alone
Product selling price Approach
Licences S and T 75,000 Residual approach
(100,000 - 12,500 - 12,500)
PCS services for S 12,500 Directly observable price
PCS services for T 12,500 Directly observable price
Total 100,000
M uses the residual approach to estimate the stand-alone selling price for the
bundle of products (S and T) with highly variable selling prices. Because the
licences will transfer to C at different points in time, M then estimates the
stand-alone selling price of each licence. It does this by allocating the 75,000
to S and T based on the average stand-alone selling price determined using the
residual approach over the past year, as follows.
Average
residual Price
Product selling price Ratio allocation Calculation
Licence S 40,000 40% 30,000 (75,000 × 40%)
Licence T 60,000 60% 45,000 (75,000 × 60%)
Total 100,000 100% 75,000
The residual approach is an estimation technique, not an

allocation method
IFRS 15.BC271 The residual approach is a technique to estimate the stand-alone selling price of
a good or service, rather than an allocation method. Therefore, the timing of the
transfer of control of each performance obligation is not relevant when applying
the residual approach to estimate the stand-alone selling price of a promised
good or service. In some cases, it may be appropriate to use a residual method
to estimate the stand-alone selling price of an item that is transferred on
contract commencement; in other cases, it may be appropriate to use a residual
method to estimate the stand-alone selling price of an item that is transferred
later in the contract.
In contracts for intellectual property or other intangible products,

a residual approach may be appropriate for determining a stand-
alone selling price
Determining stand-alone selling prices may be particularly challenging for

contracts for intellectual property (IP) or intangible assets if they are infrequently
sold separately but are often sold in a wide range of differently priced bundles.
They often have little or no incremental cost to the entity providing those
goods or services to a customer (so a cost plus a margin approach would be
inappropriate) and may not have substantially similar market equivalents from
which to derive a market assessment.
In these circumstances, the residual approach may be the most appropriate
approach for estimating the stand-alone selling price.
The assessment of whether it is appropriate to use a residual

approach should be made separately for each good or service
In some contracts, the price of one good or service may be calculated with
reference to the price of another good or service. For example, in a contract
containing IP and PCS, the price of PCS may be established as a fixed
percentage of the stated contract price of the licence fee.
If this is the case and the stand-alone selling price of the IP is determined to
be highly variable or uncertain, then the entity needs to consider all available
data and evidence in determining the stand-alone selling price of the PCS,
rather than assuming that the fixed percentage of the contract price represents
the stand-alone selling price of the PCS. The entity considers, among other
evidence, the price charged for actual renewals of PCS and stated renewal rates
in other contracts with similar customers.
Consideration allocated is unlikely to be zero or close to zero
IFRS 15.BC273 If applying the residual approach under the standard results in no or very little
consideration being allocated to a good or service, or to a bundle of goods or
services, then this outcome may not be reasonable unless the contract is only
partially in the scope of the standard and another standard also applies to the
contract (see Section 6.3).
If an entity has determined in applying Step 2 of the model that a good or
service is distinct, then by definition it has value to the customer on a stand-
alone basis. In this case, an entity considers all reasonably available data
and whether the stand-alone selling price of that good or service should be
estimated using another method.
4.2 Allocate the transaction price

IFRS 15.76 At contract inception, the transaction price is generally allocated to each
performance obligation on the basis of relative stand-alone selling prices. However,
when specified criteria are met, a discount (see 4.2.1) or variable consideration
(see 4.2.2) is allocated to one or more, but not all, of the performance obligations in
the contract.
IFRS 15.88–89 After initial allocation, changes in the transaction price are allocated to satisfied and
unsatisfied performance obligations on the same basis as at contract inception,
subject to certain limited exceptions (see Section 4.3).
4.2 Allocate the transaction price |
Example 2 – Allocating the transaction price
Telco T enters into a 12-month phone contract in which a customer is provided

with a handset and a plan that includes data, calls and texts (the wireless plan)
for a price of 35 per month. T has identified the handset and the wireless plan as
separate performance obligations.
T sells the handset separately for a price of 200, which provides observable
evidence of a stand-alone selling price. T also offers a 12-month service plan
without a phone that includes the same level of data, calls and texts for a price
of 25 per month. This pricing is used to determine the stand-alone selling price
of the wireless plan as 300 (25 × 12 months).
T allocates the transaction price of 420 (35 × 12 months)1 to the performance
obligations based on their relative stand-alone selling prices as follows.
Stand-alone
Performance selling Selling Price
obligation prices price ratio allocation Calculation
Handset 200 40% 168 (420 × 40%)
Wireless plan 300 60% 252 (420 × 60%)
Total 500 100% 420
Note
1. In this example, the entity does not adjust the consideration to reflect the time value
of money. This could happen if the entity concludes that the transaction price does not
include a significant financing component or if the entity elects to use the practical
expedient (see Section 3.2).
Allocating the transaction price may be simple if stated contract

prices are acceptable estimates of stand-alone selling price
In some cases, an entity may determine that a stated contract price is an

acceptable estimate of the stand-alone selling price for its performance
obligations – e.g. if the stated contract price is within a narrow range of
observable selling prices (see 4.1.1). If this is the case for all of the performance
obligations in a contract and there is no allocation of variable consideration or
discounts, then this will simplify allocation of the transaction price.
For example, Medical Device Company MDC sells a medical imaging device
bundled with one year of PCS and 10 days of training to a customer for a total
fee of 564,900. MDC determines that the medical imaging device, PCS and
training are separate performance obligations. There is no variable consideration
or discounts that are required to be allocated entirely to some but not all
performance obligations.
The stated contract prices for the goods and services are as follows.
Goods and services Contract prices
Medical imaging device 505,000

One year of PCS 50,000
Training 9,900
Total 564,900
MDC has established a narrow range of stand-alone selling prices for each of
the goods and service identified as separate performance obligations.
Range of stand-alone
Performance obligation selling prices
Medical imaging device 500,000–525,000

One year of PCS 50,000–52,500
Training 960–990 per day
Because all of the stated contract prices fall within narrow ranges, the stated
contract price may be used to allocate the transaction price to the performance
obligations. No further allocation is required.
Additional calculations are necessary if the stand-alone selling

price of one or more performance obligations differs from its
stated contract price
If the stated contract price for any of the performance obligations in the
arrangement is not an appropriate estimate of stand-alone selling price, then it
will be necessary for the entity to perform a relative selling price allocation of the
transaction price.
This will be the case if, for example, the stated contract price falls outside the
narrow range of stand-alone selling prices established for that performance
obligation. When this is the case, an entity should apply a consistent policy to
determine which price in the range of stand-alone selling prices should be used
as the stand-alone selling price.
For example, an entity may consider a policy of using either (1) the midpoint
of the range or (2) the outer limit of the range nearest to the stated contract
price for that performance obligation. The appropriateness of the policy will be
determined by whether the resulting allocation of the transaction price would
meet the allocation objective.
This can be illustrated by varying the facts in the previous example. For example,
assume that the total fee for the arrangement is 551,000, with stated contract
prices of 520,000 for the medical imaging device, 26,000 for the PCS and 5,000
for the training. Medical Device Company MDC’s policy is to estimate stand-
alone selling prices using the midpoint of its narrow range of observable selling
prices for performance obligations whose stated contract prices fall outside the
established ranges when performing the relative selling price allocation.
Because the stated prices for PCS and training fall outside their respective
estimated selling price ranges, consistent with its policy MDC allocates the
transaction price using the midpoint of the ranges as follows.
Stand-
alone Selling
Performance Stated selling price Price
obligation price price ratio allocation
Medical imaging
device (stated price
within range) 520,000 520,0001 89.5% 493,145
One year of PCS
(midpoint of range) 26,000 51,2502 8.8% 48,488
Ten days of training
(midpoint of range) 5,000 9,7503 1.7% 9,367
Total 551,000 581,000 100.0% 551,000
Notes
1. The stated contract price is used because it falls within the narrow range.
2. The midpoint of the range 50,000–52,500 is used because the stated contract price is
outside the narrow range.
3. The midpoint of the range 960–990 per day × 10 days is used because the stated price is
outside the narrow range.
4.2.1 Allocating a discount

IFRS 15.81 If the sum of the stand-alone selling prices of a bundle of goods or services exceeds
the promised consideration in a contract, then the discount is generally allocated
proportionately to all of the performance obligations in the contract. However, this
does not apply if there is observable evidence that the entire discount relates to
only one or more but not all of the performance obligations.
IFRS 15.82 This evidence exists, and a discount is allocated entirely to one or more, but not all,
of the performance obligations, if the following criteria are met:
– the entity regularly sells each distinct good or service, or each bundle of distinct
goods or services, in the contract on a stand-alone basis;
– the entity also regularly sells, on a stand-alone basis, a bundle (or bundles) of
some of those distinct goods or services at a discount to the stand-alone selling
prices of the goods or services in each bundle; and
– the discount attributable to each bundle of goods or services is substantially the
same as the discount in the contract, and an analysis of the goods or services in
each bundle provides observable evidence of the performance obligation(s) to
which the entire discount in the contract belongs.
IFRS 15.83 Before using the residual approach, an entity applies the guidance on allocating
a discount.
Example 3 – Allocating a discount: Transaction involving a

customer loyalty programme
IFRS 15.82–85 Retailer R has a customer loyalty programme that rewards a customer with
one customer loyalty point for every 10 purchases of products. Each point is
redeemable for a 1 discount on any future purchases of R’s products. During a
reporting period, Customer C purchases products and gift cards for 1,200 and
earns 100 points that are redeemable on future purchases. The consideration is
fixed and the stand-alone selling price of the purchased products is 1,200 (1,000
for products and 200 for gift cards). R expects 95 points to be redeemed. R
estimates a stand-alone selling price of 0.95 per point (totalling 95) on the basis
of the likelihood of redemption.
The loyalty points provide a material right to C that it would not receive without
entering into the contract. Therefore, R concludes that the promise to provide
the loyalty points is a performance obligation.
The sum of the stand-alone prices of 1,295 (1,000 in products, 200 in gift
cards and 95 in loyalty points) exceeds the promised consideration of 1,200. R
needs to determine whether to allocate the discount to all or only some of the
R regularly sells both the gift cards and the products with loyalty points on a
stand-alone basis. The amounts paid for the gift cards are equal to the stand-
alone selling price. R also regularly sells, on a stand-alone basis, the products
and loyalty points in a bundle at substantially the same discount as under the
contract being evaluated. As a result, R has evidence that the entire discount
should be allocated to the promise to transfer the products and loyalty points,
and not the gift cards.
As a result, R determines that the discount relates entirely to the products and
loyalty points. R allocates the transaction price to the products, gift cards and
loyalty points as follows.
Performance Stand-alone Price

obligation selling price allocation Calculation
Gift cards 200 200

Products 1,000 913 1,000 × (1,000 / 1,095)
Loyalty points 95 87 1,000 × (95 / 1,095)
Total 1,295 1,200
Analysis is required when a large number of goods or services are

bundled in various ways
Some arrangements involve several different goods or services that may be

sold in various bundles. In this case, an entity may need to consider numerous
possible combinations of products to determine whether the entire discount in
the contract can be allocated to a particular bundle. This raises the question of
how much analysis needs to be performed by an entity that sells a large number
of goods or services that are bundled in various ways and for which the discount
varies based on the particular bundle.
This analysis is required only if the entity regularly sells each good or service –
or bundle of goods or services – on a stand-alone basis. Therefore, if the entity
regularly sells only some of the goods or services in the contract on a stand-
alone basis, then the criteria for allocating the discount entirely to one or more,
but not all, of the performance obligations are not met and further analysis is
not required.
Determination of ‘regularly sells’ is a key judgement
Under the guidance on allocating a discount entirely to one or more

performance obligations, a bundle of goods or services has to be regularly
sold on a stand-alone basis. An entity may need to establish a policy to define
‘regularly sells’.
The entity needs processes and related controls to monitor sales transactions
and determine which bundles are regularly sold.
Guidance on allocating a discount typically applies to contracts

with at least three performance obligations
IFRS 15.BC283 The discount in the contract has to be substantially the same as the discount
attributable to the bundle of goods or services under the guidance on allocating
a discount entirely to one or more performance obligations. As a result, an
entity will typically be able to demonstrate that the discount relates to two or
more performance obligations, but it will be difficult to have sufficient evidence
to allocate the discount entirely to a single performance obligation. Therefore,
this provision is not likely to apply to arrangements with fewer than three

Example 4 – Allocating a discount: Discount allocated entirely to

one or more, but not all, performance obligations in a contract
IFRS 15.IE167–IE172 Telco C enters into a contract with a residential customer to sell phone, internet
and television services for a total amount of 120. C regularly sells the products
individually for the following prices.
Product Stand-alone selling prices
Phone 40
Internet 55
Television 45
Total 140
C also regularly sells phone and internet services together for 75.
The contract includes a discount of 20 on the overall transaction (140 - 120),
which is allocated proportionately to the three services in the contract when
applying the relative stand-alone selling price method. However, because C
regularly sells phone and internet services as a bundle for 75 (at a 20 discount
compared with their total selling price of 95 (55 + 40)) and television services
for 45, it has evidence that the entire discount should be allocated to the phone
and internet services.
Performance Stand-alone Selling Price

obligation selling prices price ratio allocation Calculation
Phone 40 42% 32 (75 × 42%)

Internet 55 58% 43 (75 × 58%)
Total 95 100% 75
C recognises revenue of 32 for phone, 43 for internet and 45 for television

services.
Example 5 – Allocating a discount: Bundle discount allocated to all

performance obligations in a contract
IFRS 15.82 Telco B offers phone, internet and television services to residential customers at
20, 30 and 40 per month, respectively. If a customer contracts for either phone
and internet or internet and television services, then B gives a discount of 5. If
the customer takes all three services, then B gives a discount of 10. Because
the discount attributable to each bundle is not the same and the analysis of the
services in each bundle does not provide observable evidence that the discount
relates to just one or two services, the discount of 10 is allocated to all three
services as shown below.
Performance Stand-alone Allocation of

obligation selling prices discount Price allocation
Phone 20 10 × 20 / 90 18
Internet 30 10 × 30 / 90 27
Television 40 10 × 40 / 90 35
4.2.2 Allocating variable consideration

IFRS 15.84 Variable consideration (see Section 3.1) may be attributable to:
– all of the performance obligations in a contract;
– one or more, but not all, of the performance obligations in a contract: e.g. a bonus
that is contingent on transferring a promised good or service within a specified
time period; or
– one or more, but not all, of the distinct goods or services promised in a series of
distinct goods or services that form part of a single performance obligation: e.g.
an annual increase in the price of cleaning services linked to an inflation index
within a facilities management contract.
IFRS 15.85 An entity allocates a variable amount – and subsequent changes to that amount –
entirely to a performance obligation, or to a distinct good or service that forms part
of a single performance obligation, only if both of the following criteria are met:
– the variable payment terms relate specifically to the entity’s efforts to satisfy the
performance obligation or transfer the distinct good or service (or to a specific
outcome of satisfying the performance obligation or transferring the distinct good
or service); and
– allocating the variable amount of consideration entirely to the performance
obligation or distinct good or service is consistent with the standard’s overall
allocation principle when considering all of the performance obligations and
payment terms in the contract.
Judgement is required based on careful consideration of all facts and circumstances

to determine whether a variable payment relates directly to a specific performance
obligation, especially when variation in the price is not directly linked to a change in
effort – e.g. if pricing in the contract is based on a market price or an index.
If a contract contains different types of variable consideration, then an entity applies

the requirements in the standard separately to each type.
IFRS 15.BC285 In some cases, a contract that contains a series of distinct goods or services (see
Section 2.3) may contain both fixed and variable consideration. In these cases,
variable consideration may be attributed to one or more, but not all, distinct goods
or services promised in the series. This allows an entity, in some cases, to attribute
the reassessment of variable consideration to only the satisfied portion of a
performance obligation if that performance obligation is a series of distinct goods or
services. For an illustration, see Example 8 in this chapter.
Example 6 – Allocating variable consideration: Variable

consideration allocated entirely to one performance obligation in
the contract
IFRS 15.IE179–IE182
Company M
Contract
Equipment X Equipment Y
Price: 800 Price: 800 or 1,000
Company M enters into a contract with Customer N for two pieces of

equipment, Equipment X and Equipment Y. M determines that X and Y represent
two performance obligations, each satisfied at a point in time. The stand-alone
selling prices of X and Y are 800 and 1,000, respectively.
The price stated in the contract for X is a fixed amount of 800. For Y, the price
is 800 if the equipment is used by N to produce 1,000 products or less in
Year 1 and 1,000 if it’s used to produce more than 1,000 products in Year 1. M
estimates that it will be entitled to variable consideration of 1,000 and that it is
highly probable that a significant reversal in the amount of cumulative revenue
recognised will not occur.
M allocates the estimated 1,000 in variable consideration entirely to Y because:
– the variable payment relates specifically to Y; and
– the estimated amount of variable consideration and the fixed amount for X
approximate the stand-alone selling prices of each product.
M recognises revenue for X and Y of 800 and 1,000, respectively, when control
of the good is transferred to N.
Example 7 – Allocating variable consideration: Each shipment is a

distinct performance obligation
Mining Company M enters into a contract to deliver 12 monthly shipments

of gold ore to Customer C. Each shipment is priced based on the spot price
for gold at the date of the shipment. M determines that each shipment is a
distinct performance obligation. M considers that the amount paid by C for
a specific shipment of gold ore is independent of past or future shipments –
i.e. the amount paid is resolved entirely as a result of delivering one specific
shipment. Therefore, M concludes that the variability resulting from changes
in market price relates directly to each distinct monthly shipment and that
allocating this variable consideration to each shipment is consistent with the
allocation objective.
Variable consideration allocation guidance is applied before the

guidance on allocating discounts
IFRS 15.86 In some cases, a contract may contain both variable consideration and a
discount. For example, an entity may sell products in a bundle at a discount
to the aggregate stand-alone selling prices of the products in the bundle. In
addition, the transaction price may include a variable element.
In these cases, an entity applies the guidance on allocating variable
consideration before it applies the guidance on allocating discounts. That is,
the standard includes an allocation hierarchy. When a contract contains both
variable consideration and a discount, applying the allocation guidance in the
reverse order may result in an incorrect allocation of the transaction price.
Some contracts contain features that may be variable consideration and/or
a discount – e.g. a rebate. In these cases, an entity evaluates the nature of
the feature. If the rebate causes the transaction price to be variable – e.g. the
amount of the rebate depends on the number of purchases that a customer
makes – then the entity follows the hierarchy and applies the guidance on
allocating variable consideration first. Conversely, if a rebate is fixed and not
contingent – e.g. the rebate is simply a fixed discount against the aggregate
stand-alone selling prices of the items in a bundle – then an entity applies
the guidance on allocating discounts and does not consider the guidance on
allocating variable consideration.
Evaluating whether the allocation objective is met when

allocating variable consideration to a distinct service period in a
series
In some cases, a contract that contains a series of distinct goods or services

may include variable consideration. In this situation, an entity needs to
determine whether variable consideration can be allocated to a distinct time
increment within a series – e.g. a day, month or year. For the analysis, an entity
may use the following factors that may indicate that the variable pricing depicts
the amount of consideration to which the entity would expect to be entitled for
providing goods or services in each distinct period.
– The variable pricing is based on a per-unit amount or formula and that pricing
is consistent throughout the contract.
– The entity charges a commensurate price per transaction or per user when it
charges separately.
– The consideration is commensurate with the value or benefit to the customer
– e.g. a hotel management fee that is based on a percentage of daily room
fees.
– The consideration is commensurate with the entity’s efforts to fulfil the
service – e.g. reimbursement of variable labour costs.
– The pricing is consistent with the entity’s customary pricing practices.
Example 8 – Allocating variable consideration: Series of distinct

services
Company X is an electricity provider. X enters into a contract with Customer C to

supply electricity for one year on the following terms.
– The amount and timing of the electricity supply are at C’s discretion: i.e. the
quantity is variable.
– The fee includes a fixed and a usage-based component.
– The fixed fee is 1,200 and is payable in monthly instalments.
– The usage-based fee is a standard price of 1 per kWh and is payable at the
end of each month. The price per kWh is fixed for the whole contract period.
X determines that it has a stand-ready obligation to supply electricity because

the amount and timing of the supply are at C’s discretion. X also determines that
this stand-ready obligation is a series because:
– each increment of X’s services (e.g. month, day etc) is distinct and has the
same pattern of transfer to C;
– C simultaneously receives and consumes the benefits of the electricity as it
is provided (see Section 5.2); and
IFRS 15.BC285 – X would use the same time-based method to measure its progress in
transferring each increment of its service to C (see Section 5.3).
X allocates the fixed fee on a straight-line basis throughout the year. This is
because the fixed fee relates to a stand-ready obligation. X allocates the variable
fee based on the daily or monthly electricity consumption. This is because,
under the terms of the contract, the variable payment relates to the amount of
electricity used during a period and therefore variable consideration is allocated
only to the satisfied portion of a performance obligation. This allocation is
consistent with the allocation objective. The pricing is consistent throughout
the contract and the rates charged are consistent with X´s standard pricing
practices with similar customers.
Example 9 – Technology company: Up-front fees and allocation of

variable consideration
Technology Company T enters into a contract with Customer C to provide C

with access to its hosted transaction processing software application for three
years. T concludes that the software licence is not distinct from the hosting
services and that there is a single performance obligation satisfied over time
to provide transaction processing services. It also concludes that the licence is
not the predominant item in the transaction, because the hosting services have
a significant value to C. Therefore, the licence guidance does not apply to this
T charges 0.90 per transaction throughout the contract period, billed quarterly.
In addition, C is required to pay a non-refundable up-front fee of 48,000.
T determines that it should recognise the transaction-based fees in the period in
which the transactions are processed, because:
– the variable amounts relate specifically to C’s usage of the application that
day; and
– allocating the transaction-based fees to each day is consistent with the
allocation objective because each day has a similar pricing structure. When
considering whether the fixed fee is allocated to all of the days in the
contract, the resulting allocation of potential variable amounts and fixed fees
depicts what T would expect to receive for each day of service.
The fixed fee is attributable to the entire performance obligation and recognised
over the contract period.
Example 10 – Pharmaceutical company: Allocating elements of the

transaction price to specific performance obligations
Biotech Company B enters into a contract with Pharma Company C for

Compound X, which is under development. Under the arrangement, C
will receive a licence for X and B will continue to perform the research and
development (R&D) activities required to take X through to commercialisation.
Under the contract, B receives an hourly rate for its R&D services and 2% of any
sales of X by C. This hourly rate is consistent with the rate that B charges other
entities for similar services.
B assesses the arrangement and determines that the hourly rate reflects
the stand-alone selling price of the R&D services. Therefore, B concludes
that it is appropriate to allocate the sales-based royalty entirely to the
licence arrangement.
If, instead of an hourly rate, B received monthly fixed payments designed to
cover the costs of R&D, careful consideration would be required to determine
whether it was appropriate to allocate those payments in their entirety to the
R&D services. If it was not appropriate, then B would be required to determine
the stand-alone selling price of the licence and R&D services and allocate the
fixed payments on that basis.
Allocating the transaction price will also be more complex if the consideration
under the contract includes a significant non-refundable up-front payment.
Example 11 – Pharmaceutical company: Allocating variable

consideration to multiple performance obligations
Company X enters into a contract with Customer C for two IP licences

(Licences E and F). X determines that the promises to transfer the licences
represent two distinct performance obligations, each of which is satisfied at a
point in time. The prices stated in the contract are as follows:
– Licence E: a fixed fee of 2,000; and
– Licence F: 3% of C’s future sales of products that use that licence.
X estimates that its sales-based royalties (i.e. the total variable consideration)
will be 1,500. The stand-alone selling prices of E and F are 1,800 and 1,700,
respectively.
X determines that the royalty relates directly to F and that allocating all of the
variable consideration to F is consistent with the allocation objective. Therefore,
it allocates the total variable consideration of 1,500 entirely to F.
X allocates the fixed consideration as follows:
– 1,8001 to E; and
– 2001 to F.
4.3 Changes in the transaction price |
Note
1. In this example, the entire variable consideration is allocated to F and the fixed
consideration is allocated to E in an amount equal its stand-alone selling price. The
remaining amount of fixed consideration of 200 (2,000 - 1,800) is allocated to F.
4.3 Changes in the transaction price

IFRS 15.87–90 After contract inception, the transaction price may change for various reasons –
including the resolution of uncertain events or other changes in circumstances that
affect the amount of consideration to which an entity expects to be entitled.
In most cases, these changes are allocated to performance obligations on the same
basis as at contract inception; however, changes in the transaction price resulting
from a contract modification are accounted for under the standard’s contract
modifications guidance (see Chapter 8). If a change in the transaction price occurs
after a contract modification, then it is allocated to the performance obligations
in the modified contract – i.e. those that were unsatisfied or partially unsatisfied
immediately after the modification – unless the:
– change is attributable to an amount of variable consideration that was promised
before the modification; and
– modification was accounted for as a termination of the existing contract and
creation of a new contract.
IFRS 15.89 A change in the transaction price is allocated to one or more distinct goods or
services only if specified criteria are met (see 4.2.2).
IFRS 15.88
Any portion of a change in transaction price that is allocated to a satisfied
performance obligation is recognised as revenue – or as a reduction in revenue – in
the period of the transaction price change.
Example 12 – Discretionary credit: Service quality issue
Telco F provides a customer with a credit in the current month due to a short
period of service quality issues experienced in the prior month (often referred
to as a ‘goodwill credit’). F determines that this results in a change in the
transaction price, rather than variable consideration (see Section 3.1). Because
the goodwill credit relates to a satisfied performance obligation, the credit
is recognised in its entirety in the month in which it is granted (i.e. when F
promises to pay the consideration).
Example 13 – Discretionary credit: Retention
Telco G grants a one-time credit of 50 to a customer in Month 14 of a two-year

contract. The credit is discretionary and is granted as a commercial gesture, not
in response to prior service issues (often referred to as a ‘retention credit’). The
contract includes a subsidised handset and a voice and data plan.
G does not regularly provide these credits and therefore customers do not
expect them to be granted. Therefore, G concludes that this is a change in the
transaction price and not variable consideration (see Section 3.1). Because
the credit does not relate to a satisfied performance obligation, the change
in transaction price resulting from the credit is accounted for as a contract
modification and recognised over the remaining term of the contract (see
Section 8.2).
If, in this example, rather than providing a one-time credit, G granted a discount
of 5 per month for the remaining contract term, then G would also conclude that
it was a change in the transaction price. It would apply the contract modification
guidance and recognise the credit over the remaining term of the contract (see
Section 8.2).
5 Step 5 – Recognise revenue when or as the entity satisfies a performance obligation | 113
5 Step 5 – Recognise
revenue when or as
the entity satisfies a
Overview
An entity recognises revenue when or as it satisfies a performance obligation by

transferring a good or service to a customer, either at a point in time (when) or
over time (as).
A good or service is ‘transferred’ when or as the customer obtains control of it.
IFRS 15.32 At contract inception, an entity first evaluates whether it transfers control of the good
or service over time – if not, then it transfers control at a point in time.
Is the performance obligation satisfied over time

– i.e. is one of the criteria met? (See Section 5.2)
Yes No
Identify an appropriate method Recognise revenue at the point in

to measure progress time at which control of the good
(see Section 5.3) or service is transferred
(see Section 5.4)
Apply that method to recognise

revenue over time
IFRS 15.BC121 The analysis of when control transfers is performed primarily from the perspective
of the customer.
IFRS 15.B52–B62 For a performance obligation that is a licence of intellectual property (IP), the
standard provides specific application guidance on assessing whether revenue is
recognised at a point in time or over time (see Chapter 9).
5.1 Transfer of control

IFRS 15.31–32 A good or service is transferred to a customer when the customer obtains control
of it. ‘Control’ refers to the customer’s ability to direct the use of, and obtain
substantially all of the remaining benefits from, an asset. It also includes the ability
to prevent other entities from directing the use of, and obtaining the benefits from,
an asset. Potential cash flows that are obtained either directly or indirectly – e.g.
from the use, consumption, sale or exchange of an asset – are benefits of an asset.
Control is…
the ability – The customer has a present right

to direct the use – The right enables it to:
of - deploy the asset in its activities
- allow another entity to deploy the asset in its activities
- prevent another entity from deploying the asset
and obtain – The right also enables it to obtain potential cash flows
the remaining directly or indirectly – e.g. through:
benefits from - use of the asset
- consumption of the asset
- sale or exchange of the asset
- pledging the asset
- holding the asset
… an asset
Use of control concept to recognise revenue aligns with the

accounting for assets
IFRS 15.BC118 The standard is a control-based model. First, an entity determines whether
control of the good or service transfers to the customer over time based on the
criteria in the standard and, if it does, the pattern of that transfer. If it does not,
then control of the good or service transfers to the customer at a point in time
(see Section 5.4).
5.2 Performance obligations satisfied over time |
The standard extends a control-based approach to all arrangements, including

service contracts. The International Accounting Standards Board (the Board)
believes that goods and services are assets – even if only momentarily – when
they are received and used by the customer. The standard’s use of control to
determine when a good or service is transferred to a customer is consistent
with the current definition of an asset under IFRS, which principally uses control
to determine when an asset is recognised or derecognised.
5.2 Performance obligations satisfied over time

IFRS 15.32, 35 For each performance obligation in a contract, an entity first determines whether
the performance obligation is satisfied over time – i.e. control of the good or
service transfers to the customer over time. It does this using the following criteria
(a different approach applies if the performance obligation is a licence of IP – see
Chapter 9).
Criterion Example
The customer simultaneously receives

and consumes the benefits provided by Routine or recurring services –
1
the entity’s performance as the entity e.g. cleaning services
performs
The entity’s performance creates or

enhances an asset that the customer Building an asset on a
2
controls as the asset is created or customer’s site
enhanced
The entity’s performance does not

create an asset with an alternative use Building a specialised asset
to the entity (see 5.2.1) and the entity that only the customer can
3
has an enforceable right to payment use or building an asset to a
for performance completed to date customer’s specifications
(see 5.2.2)
IFRS 15.35, 38–39 If one or more of these criteria are met, then the entity recognises revenue over
time, using a method that depicts its performance – i.e. the pattern of transfer
of control of the good or service to the customer. If none of the criteria is met,
then control transfers to the customer at a point in time and the entity recognises
revenue at that point in time (see Section 5.4).
Criterion 1
IFRS 15.B3–B4, BC125–BC128 A customer simultaneously receives and consumes the benefits of the entity’s
performance as the entity performs and another entity would not need to
substantially reperform the work that the entity has completed to date.
When determining whether another party would not need to substantially
reperform, the entity also presumes that another party would not have the benefit
of any asset that the entity presently controls and would continue to control if that
other party took over the performance obligation.
Criterion 2
IFRS 15.B5, IU 03-18 In evaluating whether a customer controls an asset as it is created or enhanced, an
entity considers the guidance on control in the standard, including the indicators of
the transfer of control (see Section 5.4).
In evaluating Criterion 2 for sales of real estate, an entity focuses on the real estate
unit itself, rather than on the right to sell or pledge a right to obtain the real estate in
the future. This is because the latter does not provide evidence of control of the real
estate unit.
Criterion 3
IFRS 15.36 In assessing whether an asset has an alternative use, at contract inception an entity
considers its ability to readily direct that asset in its completed state for another
use – e.g. selling it to a different customer.
Applying Criteria 1 and 3

IFRS 15.B4, B6–B8, BC127 Potential contractual restrictions or practical limitations may prevent the entity from
transferring the remaining performance obligation to another entity (Criterion 1) or
directing the asset for another use (Criterion 3). The standard provides guidance on
whether these facts or possible termination affect the assessment of those criteria.
It provides the following guidance on the assumptions that an entity should make
when applying Criteria 1 and 3.
Consider Consider Consider

Determining contractual practical possible
whether… restrictions? limitations? termination?
Another entity would

not need to substantially No No Yes
reperform (Criterion 1)
The entity’s performance
does not create an asset
Yes Yes No
with an alternative use
(Criterion 3)
Example 1 – Assessing whether another entity would need to

reperform the work completed
IFRS 15.BC126 Company M enters into a contract to transport equipment from Los Angeles
to New York City. If M delivers the equipment to Denver – i.e. only part of the
way – then another entity could transport the equipment the remainder of the
way to New York City without reperforming M’s performance to date. The other
entity would not need to take the goods back to Los Angeles to deliver them
to New York City. Criterion 1 is met and transportation of the equipment is a
performance obligation that is satisfied over time.
Differences in assumptions used when applying Criteria 1 and 3
IFRS 15.BC139 The consideration of contractual restrictions and practical limitations differs
for the assessment of Criteria 1 and 3 because they are designed to apply to
different scenarios.
Criterion 1 involves a hypothetical assessment of what another entity would
need to do if it took over the remaining performance obligation. Contractual
restrictions or practical limitations, which would otherwise prevent the entity
from transferring the performance obligation to another entity, are not relevant
when assessing whether the entity has transferred control of the goods or
services provided to date.
By contrast, Criterion 3 focuses on the entity’s ability to direct the completed
asset for an alternative use, assuming that the contract is fulfilled. This ability
is directly affected by the existence of contractual restrictions and practical
limitations.
However, the entity’s rights on contract termination are considered when
evaluating whether the entity has a right to payment under Criterion 3.
Determining whether a commodity transfers over time may

depend on Criterion 1
An entity that agrees to deliver a commodity considers the nature of its promise
to determine whether to recognise revenue over time or at a point in time. In
many contracts to deliver commodities, an entity has promised to transfer a
good and will consider the point-in-time guidance to determine when control
transfers. However, there may be scenarios in which an entity has promised
to provide a service of delivering a commodity that the customer immediately
consumes and therefore immediately receives the benefits.
For example, a contract to deliver natural gas to temporary storage may
represent a promise to deliver a good, whereas a contract to provide natural
gas to the customer for on-demand consumption may represent a service that
meets Criterion 1 for over-time recognition.
To determine whether the customer immediately consumes the assets and

receives the benefits as the performance obligation is satisfied, the entity
evaluates the:
– inherent characteristics of the commodity;
– contract terms;
– information about the infrastructure and other delivery mechanisms; and
– other relevant facts and circumstances.
Application to service concession arrangements
IFRIC 12.14 The interpretation on service concession arrangements specifies that an

operator in a service concession arrangement accounts for construction and
upgrade services under the revenue standard. Therefore, the operator applies
the criteria in the standard to determine whether construction and upgrade
services are separate performance obligations and recognises revenue as it
satisfies the performance obligations over time or at a point in time.
In many situations, revenue from construction and upgrade services under
service concession arrangements will be recognised over time because
Criterion 2 and/or Criterion 3 will be met.
5.2.1 Performance does not create an asset with an alternative

use
IFRS 15.B7 For an asset to have no alternative use to an entity, a contractual restriction on the
ability to direct its use has to be substantive – i.e. an enforceable right. If an asset
is largely interchangeable with other assets and could be transferred to another
customer without breaching the contract or incurring significant incremental costs,
then the restriction is not substantive.
IFRS 15.B8 A practical limitation on an entity’s ability to direct an asset for another use – e.g.
design specifications that are unique to a customer – exists if the entity would:
– incur significant costs to rework the asset; or
– be able to sell the asset only at a significant loss.
IFRS 15.36 The assessment of whether an asset has an alternative use is made at contract
inception and is not subsequently updated, unless a contract modification
substantially changes the performance obligation (see Chapter 8).
Example 2 – Applying the guidance on alternative use
IFRS 15.IE73–IE76 Manufacturer Y enters into a contract with a customer to build a specialised
satellite. Y builds satellites for various customers; however, the design and
construction of each satellite differs substantially on the basis of each customer’s
needs and the type of technology that is incorporated into the satellite.
At contract inception, Y assesses whether the satellite, in its completed state,

will have an alternative use. Although the contract does not preclude Y from
directing the completed satellite to another customer, Y would incur significant
costs to rework the design and function of the satellite. In this example, the
customer-specific design of the satellite restricts Y’s practical ability to readily
direct the satellite to another customer. Therefore, the satellite does not have an
alternative use to Y.
Example 3 – Applying the guidance on alternative use: Automotive

supplier
Automotive Supplier S enters into a contract with Carmaker W to build 100

steering wheels.
S builds steering wheels for various carmakers. However, the design of some of
the components of W’s steering wheel is W’s IP. Therefore, S is not allowed to
sell completed steering wheels to other carmakers. W enforces this contractual
restriction by performing periodic inspections in S’s warehouses. In addition, S
would incur significant costs to rework the design of the steering wheel in its
completed state if it replaced W’s unique components with other carmakers’
components.
On contract inception, S assesses whether each completed steering wheel will
have an alternative use. S concludes that there are significant contractual and
practical restrictions that limit its ability to direct the completed steering wheels to
another carmaker. Therefore, S concludes that the steering wheels manufactured
for W have no alternative use.
Many factors to consider when evaluating alternative use
IFRS 15.BC136–BC139 Under the standard, an asset may not have an alternative use due to contractual
restrictions. For example, units constructed for a multi-unit residential complex
may be standardised; however, an entity’s contract with a customer may
preclude it from transferring a specific unit to another customer.
Protective rights – e.g. a customer having legal title to the goods in a contract –
may not limit the entity’s practical ability to physically substitute or redirect an
asset, and therefore on their own are not sufficient to establish that an asset
has no alternative use to the entity.
In the absence of a contractual restriction, an entity considers:

– the characteristics of the asset that will ultimately be transferred to the
customer; and
– whether the asset, in its completed form, could be redirected without a
significant cost of rework.
The focus is not on whether the asset can be redirected to another customer or
for another purpose during a portion of the production process – e.g. up until the
point at which significant customisation begins to occur. For example, in some
manufacturing contracts the basic design of an asset may be the same across
many contracts, but the customisation of the finished good may be substantial.
Consequently, redirecting the asset in its completed state to another customer
would require significant rework.
Evaluating whether costs of rework are significant
The standard does not provide guidance to help evaluate whether the cost to
rework an asset for an alternative use is significant. Therefore, judgement is
required in making the evaluation and consideration is given to both quantitative
and qualitative factors
The following are some factors that an entity may consider when making this
determination.
– Level and cost of customisation: If the customisation itself is significant,
then the cost of rework may be significant. For example, if the customisation
of the asset occurs over a significant period of time and involves significant
development and design activities or represents a significant part of the
cost of the finished product, then the cost to rework the asset for another
customer may be significant. In contrast, if the customisation occurs over a
short period of time and does not represent a significant portion of the overall
cost, then the cost to rework may not be significant.
– Incremental cost to rework vs the original costs: If the cost to rework an
asset and produce a finished product is commensurate with the original cost
of customisation, then the cost to rework may be significant. In contrast, if
the cost to rework the asset is insignificant compared with the original cost
of the asset, then the rework costs may not be considered significant.
– Activities required to rework the asset: If the activities required to rework
the asset involve design and development activities, then the cost of rework
may be more significant. However, if the materials can be quickly converted
into a raw material to be used in the entity’s normal process, then the cost
may not be as significant. For example, an entity may produce glass materials
customised to the size and shape for a particular customer but could easily
melt the glass to be reused as a raw material.
– Ability to sell the reworked asset at a reasonable profit margin: Although

the profit margin would be expected to be less than if no rework occurred,
if the entity expects to recover the costs plus a reasonable margin when
compared with sales of similar goods then the cost of rework may not be
significant. The entity should consider both the absolute monetary amount of
margin to be recovered and profit margin percentage in evaluating whether it
could expect to receive a reasonable profit margin. For example, if an entity
produces a low-cost, low-margin product, then any incremental cost may
have a significant effect on margin percentage but not a significant effect on
the absolute monetary amount expected to be recovered.
– Amount of the asset that cannot be reworked: An entity may be unable to
rework the asset or a significant portion of the component parts – e.g. if the
disassembly process would significantly damage the component parts so
that they cannot be reused or the raw material cannot be worked into other
products. That would be considered a significant economic loss, which is a
practical limitation on alternative use of the asset.
5.2.2 The entity has an enforceable right to payment for

performance completed to date
IFRS 15.37, IU 03-18 An entity that is constructing an asset with no alternative use is effectively
constructing the asset at the direction of the customer. The contract will often
contain provisions providing some economic protection against the risk of the
customer terminating the contract and leaving the entity with an asset of little or
no value. Therefore, to demonstrate that a customer controls an asset that has
no alternative use as it is being created, an entity evaluates whether it has an
enforceable right to payment for the performance completed to date.
In performing this evaluation, the entity considers whether, throughout the contract,
it is entitled to compensation for performance completed to date if the contract
is terminated by the customer or another party for reasons other than the entity’s
failure to perform as promised.
The likelihood that the customer would terminate the contract or that the entity
would exercise its right to payment are not relevant in making this assessment.
IFRS 15.B9–B13 To meet this part of Criterion 3, the entity’s right to payment has to be for an amount
that approximates the selling price of the goods or services transferred – e.g. a right
to recover costs incurred plus a reasonable profit margin. The amount to which the
entity is entitled does not need to equal the contract margin, but has to be based on
either a reasonable proportion of the entity’s expected profit margin or a reasonable
return on the entity’s cost of capital. However, if an entity would only recover its
costs, then it would not have the right to payment for performance completed to
date and this part of Criterion 3 would not be met.
In some cases, an entity may enter into a contract with a customer that is expected
to be loss-making from the outset. This usually happens when an entity pursues a
specific economic objective – e.g. to enter into a new market, an entity agrees to
sell a product in that market for a price that is below cost. It appears that a contract
with a negative margin may still meet Criterion 3 if the amount to which the entity
is entitled from the customer on termination is reasonable in proportion to the
expected margin for the contract and the performance completed to date.
Other factors to consider include the following.
Payment terms – An unconditional right to payment is not required, but

rather an enforceable right to demand or retain payment
for the performance completed to date if the contract is
terminated by the customer for convenience
Payment – A payment schedule does not necessarily indicate

schedule whether an entity has an enforceable right to payment for
performance to date
Contractual – If a customer acts to terminate a contract without having

terms a contractual right at that time to do so, then the contract
terms may entitle the entity to continue to transfer the
promised goods or services and require the customer to
pay the corresponding consideration promised
IFRS 15.B11 Legislation or – Even if a right is not specified in the contract, jurisdictional
legal precedent matters such as legislation, administrative practice or legal
precedent may confer a right to payment to the entity
– By contrast, legal precedent may indicate that rights to
payment in similar contracts have no binding legal effect
or that an entity’s customary business practice not to
enforce a right to payment may result in that right being
unenforceable in that jurisdiction
IU 03-18 Payment in – Only payments under the existing contract with the
scope of the customer are relevant for the analysis
analysis
– Amounts received or to be received from a third party
if the asset is resold are not payments for performance
under the existing contract
Example 4 – Applying the over-time criteria: Consulting contract
IFRS 15.IE69–IE72 Consulting Firm B enters into a contract to provide a professional opinion to
Customer C based on C’s specific facts and circumstances. If C terminates the
consulting contract for reasons other than B’s failure to perform as promised,
then the contract requires C to compensate B for its costs incurred plus a 15%
margin. The 15% margin is approximately the profit margin that B earns from
similar contracts.
B assesses the contract against the over-time criteria and reaches the following
conclusions.
Criterion Conclusion Rationale
1 Not met If B did not issue the professional opinion and C

hired another consulting firm, then the other firm
would need to substantially reperform the work
completed to date, because it would not have the
benefit of any work in progress performed by B.
Accordingly, C does not simultaneously receive
and consume the benefits of its performance.
2 Not met B is not creating or enhancing an asset of which

C obtains control as it performs because the
professional opinion is delivered to C only on
completion.
3 Met The development of the professional opinion

does not create an asset with an alternative
use to B, because it relates to facts and
circumstances that are specific to C. Therefore,
there is a practical limitation on B’s ability to
readily direct the asset to another customer.
The contract’s terms provide B with an
enforceable right to payment for its performance
completed to date and its costs incurred plus a
reasonable margin.
Because one of the three criteria is met, B recognises revenue relating to the
consulting services over time.
Conversely, if B determined that it did not have a legally enforceable right to
payment if C terminated the consulting contract for reasons other than B’s
failure to perform as promised, then none of the three criteria would be met. In
that situation, the revenue from the consulting service would be recognised at
a point in time – probably on completion of the engagement and delivery of the
professional opinion.
Example 5 – Applying the over-time criteria: Sales of real estate: No

alternative use and enforceable right to payment
IFRS 15.IE81–IE90 Developer D is developing a multi-unit residential complex. Customer Y enters

into a binding sales contract with D for Unit X, which is under construction. Each
unit has a similar floor plan and is a similar size. The following facts are relevant.
– Y pays a non-refundable deposit on entering into the contract and will
make progress payments intended to cover costs to date plus the margin
percentage in the contract during construction of X.
– The contract has substantive terms that preclude D from being able to direct
X to another customer.
– If Y defaults on its obligations by failing to make the promised progress
payments when they are due, then D has a right to all of the consideration
promised in the contract if it completes the construction of the unit.
– The courts have previously upheld similar rights that entitle developers to
require the customer to perform, subject to the entity meeting its obligations
under the contract.
At contract inception, D determines that because it is contractually prevented

from transferring X to another customer, X does not have an alternative use. In
addition, if Y were to default on its obligations then D would have an enforceable
right to all of the consideration promised under the contract. Consequently,
Criterion 3 is met and D recognises revenue from the construction of Unit X
over time.
A right to payment may be established by relevant laws and

regulations
IFRS 15.B11–B12, BC147 When a right to payment on termination is not specified in the contract with
the customer, an entity may still have a right to payment under relevant laws
or regulations.
The fact that the entity may sue a customer that defaults or cancels a
contract for convenience does not in itself demonstrate that the entity has
an enforceable right to payment. Generally, a right to payment exists only if
taking legal action entitles the entity to a payment for the cost incurred plus a
reasonable profit margin for the performance completed to date.
Factors to consider when determining whether an entity has a right to payment
include:
– relevant laws and regulations;
– customary business practices;
– the legal environment;
– relevant legal precedents; and
– legal opinions on the enforceability of rights (see below).
Each individual factor may not be determinative on its own. An entity needs to
determine which factors are relevant for its specific set of circumstances. In
cases of uncertainty – e.g. when the above factors are inconclusive or provide
contradictory evidence about the existence of a right to payment – an entity
considers all relevant factors and applies judgement in reaching its conclusion.
Use of legal opinion when assessing enforceability of right to

payment
IFRS 15.B12 In some cases, an entity may have an apparent right to payment described in
its contract with the customer, or under a relevant law or regulation, but there
may be uncertainty over whether the right is enforceable. This may be the case
when there is no legal precedent for the enforceability of the entity’s right.
For example, in a rising property market an entity may choose not to enforce
its right to payment in the event of customer default, because it prefers to
recover the property and resell it at a higher price. A practice of not enforcing
an apparent right to payment may result in uncertainty over whether the
contractual right remains enforceable.
In these cases, an entity may need a legal opinion to help it assess whether it
has an enforceable right to payment. However, all facts and circumstances need
to be considered in assessing how much weight (if any) to place on the legal
opinion. This may include an assessment of:
– the quality of the opinion: i.e. how strong are the legal arguments that
support it?;
– whether there are conflicting opinions provided by different legal experts;
and
– whether there are conflicting legal precedents for similar cases.
Agreements for the construction of real estate may have different

patterns of transfer of control
IFRS 15.BC150 Applying the criteria to real estate contracts may result in different conclusions
on the pattern of transfer of control, depending on the relevant facts and
circumstances of each contract. For example, the terms of some real estate
contracts may prohibit an entity from transferring an asset to another customer
and require the customer to pay for performance completed to date (therefore
meeting Criterion 3). However, other real estate contracts that create an
asset with no alternative use may only require a customer to make an up-front
deposit, and therefore would not provide the entity with an enforceable right
to payment for its performance completed to date (therefore failing to meet
Criterion 3).
In practice, a detailed understanding of the terms of the contract and local

laws may be required to assess whether an entity has a right to payment for
performance to date. For example, in some jurisdictions customer default may
be infrequent and contracts may not include extensive detail on the rights and
obligations that arise in the event of termination. In these cases, expert opinion
may be required to establish the legal position.
In other jurisdictions, real estate developers may have a practice of not
enforcing their contractual rights if a customer defaults, preferring instead to
take possession of the property so that they can sell it to a new customer.
Again, evaluation of the specific facts and circumstances, including appropriate
legal consultation, may be required to establish whether the contractual rights
remain enforceable given an established pattern of non-enforcement.
Enforceable right to payment for standard materials used as

inputs
IFRS 15.BC142 Contracts with customers to manufacture or construct goods with no

alternative use to the entity may require the use of standard raw materials or
components as inputs into the product being manufactured or constructed. In
many cases, these inputs (including work in progress) remain interchangeable
with other products until they are integrated into the customer’s product – i.e.
they have an alternative use. The entity will often not have an enforceable
right to payment for these standard inputs until they are integrated into the
customer’s product.
In these circumstances, the entity treats the raw materials or work in progress
as inventory until they are incorporated into the customer’s product. The fact
that the entity does not have an enforceable right to payment for standard
materials until they are integrated into the product being manufactured does not
result in the arrangement failing to meet Criterion 3. An entity’s right to payment
is assessed for performance completed. Standard materials are not considered
completed performance until they are integrated into the production process.
The assessment of an entity’s right to payment is for the standard materials
once they are integrated.
Termination of an over-time contract
IFRS 15.BC142 In some cases, an entity that has a contract meeting Criterion 3 for recognition
of revenue over time may choose not to enforce its right to payment. For
example, an entity may permit a customer to terminate a contract when no
termination right exists. In these cases, an entity needs to consider carefully
whether its right to payment remains enforceable such that Criterion 3 is met at
contract inception for similar contracts.
If an entity chooses to waive its enforceable right to payment, then a question

arises about how it should account for the termination – in particular, the
revenue that has been recognised over time under Criterion 3. It appears
that in these circumstances it is generally appropriate to reverse the revenue
previously recognised for which the right to payment has been waived.
For example, Developer D enters into a contract to sell an apartment to
Customer C for 100. The expected construction cost is 60. C is required to make
an up-front payment of 30, with the remaining 70 due on completion of the
apartment. C cannot terminate the contract and D has the right to complete the
apartment and require C to pay the promised consideration. D has determined
that this right is enforceable in its jurisdiction.
D determines that its contract with C meets Criterion 3 for the recognition
of revenue over time and that a cost-to-cost input measure of progress is
appropriate.
When the apartment is 80% complete, C approaches D with a request to

terminate the contract. Considering C’s circumstances, as an exception to
its customary business practice D agrees to terminate the contract, thereby
waiving its right to complete the apartment and enforce payment of 100 in cash
from C. D also agrees to refund the up-front payment of 30 to C.
At the time of the termination, D had recorded the following journal entries to
recognise revenue and costs over time as the apartment was constructed.
Debit Credit
Contract asset 50
Cash 30
Revenue (100 × 80%) 80
To recognise revenue for construction of 80% of
apartment1
Cost of sales 48
Cash/individual accounts related to construction 48
To recognise cost of sales for construction of
apartment performed to date1
Note
1. For the purposes of this example, all journal entries recorded over time are
summarised and presented as one.
We believe that it is generally appropriate for D to reverse the previously recognised

revenue and cost of sales. Therefore, D should record the following entries.
Debit Credit
Revenue 80
Contract asset 50
Cash 30
Inventories – work in progress 48
Cost of sales 48
To reverse revenue and cost of sales on
termination of contract
D carefully considers whether its right to payment remains enforceable such

that Criterion 3 is met at contract inception for similar contracts.
Modifying the example, D agrees to terminate the contract with C but
retains the up-front payment of 30. In this case, we believe that it is generally
appropriate for D to reverse the previously recognised revenue for which it has
waived payment – i.e. 50 – and cost of sales. Therefore, D should record the
following entries.
Debit Credit
Revenue 50
Contract asset 50
Inventories – work in progress 48
Cost of sales 48
To reverse revenue and cost of sales on
termination of contract
D carefully considers whether its right to payment remains enforceable such

that Criterion 3 is met at contract inception for similar contracts.
Example 6 – Applying the over-time criteria: Bottle manufacturer
Company C enters into a framework agreement to manufacture bottles for

Customer B under the following terms.
– The design of the bottles is the IP of B.
– The sales price is cost plus 10%.
– There is no stated minimum purchase quantity.
– C is required to maintain a specific level of inventory of raw materials and

finished goods.
– If B terminates the framework agreement, then it is required to purchase
inventory of raw materials at cost and work in progress and finished goods
on hand at the agreed sales price at the date of termination.
– The manufacturing process does not result in material amounts of work
in progress.
C determines that the nature of the promise to B under the framework

agreement is to manufacture bottles for use in B’s operation.
C applies the over-time criteria and determines that it does not create an asset
with an alternative use because C is legally prevented from selling the asset
to another customer. The contract’s termination clause provides C with an
enforceable right to payment for its performance completed to date – i.e. for
costs incurred plus a reasonable margin. C therefore determines that Criterion 3
is met.
Because Criterion 3 is met, C recognises revenue over time as it manufactures
bottles.
Example 7A – Applying the over-time criteria: Real estate developer:

Criterion 3 not met (1)
Real Estate Developer D in Country Y enters into a contract with Customer C

for the sale of a real estate unit in a multi-unit residential complex. The contract
contains the following terms.
– C pays a 10% deposit at contract inception and the remainder of the
purchase price after construction is complete.
– D retains legal title until C has paid the full purchase price.
– C has the right to terminate the contract at any time before construction
is complete.
– On termination, D is required to make reasonable efforts to resell the unit to a
third party.
– If the resale price obtained from the third party is less than the original
purchase price in the contract with C, then C must pay the difference to D.
IU 03-18 D applies the over-time criteria and determines that its performance does
not create an asset with an alternative use under Criterion 3. However,
the consideration to which D is entitled from C on termination is limited to
reimbursement of any loss of profit on resale. This does not approximate to the
selling price of the part-constructed real estate unit, and therefore does not
compensate D for its performance completed to date. Based on its analysis, D
concludes that Criterion 3 is not met.
Because Criterion 3 is not met, D recognises revenue at the point in time when
control of the unit transfers to C (see Section 5.4).
Example 7B – Applying the over-time criteria: Real estate developer:

Criterion 3 not met (2)
Modifying Example 7A, the contract between Real Estate Developer D and
Customer C contains the following terms.
– C pays 20% of the purchase price in instalments as the unit is constructed
and the remainder of the purchase price after construction is complete.
– D retains legal title to the unit during construction.
– C has the in rem right to the unit during construction (i.e. the legal right to the
unit), which it can resell or pledge to a new buyer.
The contract cannot be terminated under Country Y’s local law. However, the
courts in Country Y have accepted requests to terminate similar contracts in
some circumstances – e.g. when the customer becomes unemployed or ill. In
these cases, the courts have allowed the developer to retain approximately 10%
of the payments made as a termination penalty.
IU 03-18 D concludes that the in rem right to the unit does not give C the ability to direct
the use of the unit itself during construction; therefore, Criterion 2 is not met.
Although the contract does not give C a termination right, D concludes that
the legal precedent permits the termination of contracts for reasons other
than its failure to perform as promised. Further, the termination penalty of
approximately 10% of the payments that the courts have allowed the developer
to retain does not compensate the developer for performance to date.
Therefore, D concludes that Criterion 3 is not met.
Because none of the criteria for over-time revenue recognition is met, D
recognises revenue at the point in time when control of the unit transfers to C
(see Section 5.4).
5.3 Measuring progress towards complete satisfaction of a performance obligation |
Example 8 – Applying the over-time criteria: No enforceable right to

payment
Bicycle Manufacturer B enters into a contract with Customer C to build 1,000

bicycles in accordance with C’s specifications and branding. Under the contract,
C is required to pay B on delivery of the bicycles.
The contract does not include any termination or default clauses.
The extent of customisation of the bicycles means that they do not have an
alternative use; therefore, B assesses whether it has an enforceable right to
payment under Criterion 3.
– There are no clauses in the contract that give B a right to payment for its
performance completed to date.
– There is no local legislation or legal precedent that would indicate that B has a
right to payment for its performance completed to date.
B therefore determines that it does not have an enforceable right to payment
under Criterion 3 and therefore recognises revenue at the point in time when
control of the bicycles transfers to C (see Section 5.4).
5.3 Measuring progress towards complete

satisfaction of a performance obligation
5.3.1 Selecting a method to measure progress
IFRS 15.39–43, B15–B19 For each performance obligation that is satisfied over time, an entity applies a single
method of measuring progress towards complete satisfaction of the obligation.
The objective is to depict the transfer of control of the goods or services to the
customer. To do this, an entity selects an appropriate output or input method. It
then applies that method consistently to similar performance obligations and in
similar circumstances.
Method Description Examples
Output Based on direct – Surveys of performance to

measurements of the value date
to the customer of goods or
– Appraisals of results
services transferred to date,
achieved
relative to the remaining
goods or services promised – Milestones reached
under the contract
– Time elapsed
Method Description Examples
Input Based on an entity’s efforts – Resources consumed

or inputs towards satisfying
– Costs incurred
a performance obligation,
relative to the total expected – Time elapsed
inputs into the satisfaction of
– Labour hours expended
that performance obligation
– Machine hours used
IFRS 15.B16 As a practical expedient, if an entity has a right to invoice a customer at an amount
that corresponds directly with its performance to date, then it can recognise
revenue at that amount. For example, in a services contract an entity may have the
right to bill a fixed amount for each unit of service provided. See 5.3.4.
IFRS 15.B15, BC165 If an entity’s performance has produced a material amount of work in progress
or finished goods that are controlled by the customer, then output methods such
as units-of-delivery or units-of-production as they have been historically applied
may not faithfully depict progress. This is because not all of the work performed is
included in measuring the output.
IFRS 15.B18 If an input method provides an appropriate basis to measure progress and an
entity’s inputs are incurred evenly over time, then it may be appropriate to recognise
revenue on a straight-line basis.
IFRS 15.B19 However, there may not be a direct relationship between an entity’s inputs and
the transfer of control. Therefore, an entity that uses an input method considers
the need to adjust the measure of progress for uninstalled goods and significant
inefficiencies in the entity’s performance that were not reflected in the price of the
contract – e.g. wasted materials, labour or other resources (see 5.3.3). For example,
if the entity transfers to the customer control of a good that is significant to the
contract but will be installed later, and if certain criteria are met, then the entity
recognises the revenue on that good at zero margin.
IFRS 15.44–45 An entity recognises revenue over time only if it can reasonably measure its
progress towards complete satisfaction of the performance obligation. However, if
the entity cannot reasonably measure the outcome but expects to recover the costs
incurred in satisfying the performance obligation, then it recognises revenue to the
extent of the costs incurred.
Example 9 – Time-based measure of progress: Technical support

services
Company S enters into a contract to license software to Customer C and

provide technical support for the three-year licence period. The terms of the
support agreement specify that S’s helpdesk and web support operators are
available every day other than Sundays. S concludes that the software licence
and the technical support services are distinct from each other and are separate
The distinct software licence is satisfied at a point in time (see Chapter 9). S
concludes that the technical support services are satisfied over time. This is
because C consumes and receives benefit from having continuous access to
S’s support resources throughout the three-year period. That is, the technical
support is a ‘stand-ready obligation’. S determines that a time-elapsed measure
of progress is appropriate.
However, if S’s contractual obligation in relation to technical support was instead
to provide a specified number of support calls, then it would generally recognise
revenue as C makes use of the specified calls.
Example 10 – Time-based measure of progress: Unspecified

updates
Company U licenses software to Customer C and promises to provide

unspecified updates for the full three-year licence period.
U concludes that the software licence and the unspecified updates rights are
distinct from each other and are separate performance obligations. The distinct
software licence is satisfied at a point in time (see Chapter 9).
U has a history of providing unspecified items to customers on a regular basis.

However, the quantity and the mix of items that a customer will receive (e.g.
bug fixes and updates) and the timing of releases within a given period vary.
Therefore, U concludes that:
– the nature of its performance obligation to provide unspecified updates,
upgrades and enhancements is a ‘stand-ready obligation’; and
– it expects to expend efforts to develop and transfer unspecified items to
the customer on a generally even basis throughout the three-year term. U
determines that a time-based measure of progress is appropriate, resulting
in straight-line revenue recognition for the performance obligation.
Determining which measure of progress to apply is not a free

choice
IFRS 15.BC159 The standard requires an entity to select a method that is consistent with the
objective of depicting its performance. An entity therefore does not have a free
choice of which method to apply to a given performance obligation – it needs
to consider the nature of the good or service that it promised to transfer to
the customer.
The standard also provides examples of circumstances in which a particular
method does not faithfully depict performance – e.g. it states that units-of-
production may not be an appropriate method when there is a material amount
of work in progress. Judgement is required when identifying an appropriate
method of measuring progress.
When evaluating which method depicts the transfer of control of a good

or service, the entity’s ability to apply that method reliably may also be
relevant. For example, the information required to use an output method
may not be directly observable or may require undue cost to obtain – in these
circumstances, an input method may be appropriate.
Single method of measuring progress is used for a performance

obligation
IFRS 15.40 Under the standard, an entity applies a single method of measuring progress for
each performance obligation. This may be difficult when a single performance
obligation contains multiple promised goods or services that will be transferred
over different periods of time. For example, this might occur when a
performance obligation combines a licence and a service arrangement, or a sale
of goods and design or installation services.
Significant judgement may be required in some circumstances, and

understanding the nature of its overall promise to the customer is key for an
entity to select a reasonable measure of progress.
If the determination of a single measure of progress is challenging, then an
entity may need to reconsider the assessment of performance obligations
and whether there are multiple distinct performance obligations. However,
the fact that identifying a single measure of progress is challenging does
not necessarily mean that the promised goods or services are not a single
Certain sales agent arrangements may be over-time
Generally, when the entity is acting as a sales agent for a customer the entity
satisfies its promise at a point in time. This is because the activities performed
by the agent before sale typically do not transfer a good or service to a
customer. If the customer receives any benefit from the entity’s activities, then
that benefit is limited unless the sale is completed.
However, there may be sales agent arrangements that provide benefits to
the customer over time before a sale is completed. For example, assume that
an entity receives a significant non-refundable fee at the time of listing and a
relatively smaller commission fee when a sale is completed. The large non-
refundable up-front fee indicates that the entity is providing the customer with a
listing service and the customer is benefiting from that service over time. In this
example, the entity estimates the commission fee following the guidance on
Judgement and evaluation of the facts will be necessary to determine whether
a good or service is being transferred before the sale is completed.
Measure of progress for stand-ready obligations is not always

straight‑line
IFRS 15.26(e), IE92–IE94, BC160 Judgement is required to determine an appropriate measure of progress for a
stand-ready obligation. When making the judgement, an entity considers the
substance of the stand-ready obligation to ensure that the measure of progress
aligns with the nature of the underlying promise. In assessing the nature of the
obligation, the entity considers all relevant facts and circumstances, including
the timing of transfer of goods or services, and whether the entity’s efforts
(i.e. costs) are expended evenly throughout the period covered by the stand-
ready obligation.
In many cases, a straight-line measure of progress will be appropriate for

recognising revenue on a stand-ready obligation. However, a straight-line
measure of progress is not always appropriate.
For example, in a contract for unspecified software upgrades (a stand-ready
obligation) or a health club contract, revenue is generally recognised on a
straight-line basis because the pattern of benefit to the customer as well as the
entity’s efforts to fulfil the contract are generally even throughout the period. In
contrast, a straight-line basis of recognition would not generally be appropriate
in an annual contract to provide snow removal services in an area where
snowfall is highly seasonal. The pattern of benefit of these services, as well as
the entity’s effort to fulfil the contract, would not generally be even throughout
the year, because snow is only expected in the winter.
Milestone method may not depict pattern of performance
If control transfers to the customer over time, then the measure of progress
should reflect this. Although the standard lists milestones as an example of
a possible measure of progress when using an output method, it remains
necessary to consider whether milestones faithfully depict performance,
particularly if the milestones are widely spaced. This is because control
generally transfers continuously as the entity performs, rather than at discrete
points in time. Normally, a milestone method would need to incorporate a
measure of progress between milestone achievements to faithfully depict an
entity’s performance.
Work in progress for an over-time performance obligation is generally expensed
as a fulfilment cost when it is incurred because control of the work in progress
transfers to the customer as it is produced and not at discrete intervals.
However, inventory to support multiple contracts that has an alternative use is
recognised as an asset until it is dedicated to a specific contract – e.g. by being
integrated into the production process.
A performance obligation may be partially satisfied before the

contract is identified
IFRS 15.2, 9, 95, 99, BC48 Entities sometimes start to perform before:
– entering into a contract with a customer; or
– the contract with the customer meets the Step 1 criteria (e.g. collectability is
not probable).
In these cases, if the work completed to date has no alternative use and the
performance obligation meets the criteria for revenue to be recognised over
time, then the entity recognises a cumulative catch-up adjustment at the date
on which the Step 1 criteria are met. This is because under the standard an
entity recognises revenue based on progress towards complete satisfaction
of the performance obligation. Therefore, because the entity has already
partially satisfied the performance obligation, it recognises revenue to reflect
that performance.
For example, if a developer sells an apartment to a customer when the

apartment is 20 percent complete and the contract meets the criteria to
recognise revenue over time, then the developer recognises 20 percent of its
revenue under the contract on the date on which the contract is signed.
Additionally, fulfilment costs incurred before the existence of the contract that
are not in the scope of another standard (e.g. inventory) would be capitalised
as costs to fulfil an anticipated contract when the capitalisation criteria are met
(see Chapter 7). These costs are expensed immediately at the date on which
the Step 1 criteria are met if they relate to progress made to date on goods or
services already deemed to have transferred to the customer at that date.
Borrowing costs when revenue is recognised over time
IU 03-19 An entity may borrow funds to fulfil its contracts with customers. A question
arises over whether directly attributable borrowing costs may be capitalised
under the borrowing costs standard when control transfers to the customer
over time – in particular, whether an entity may have a qualifying asset in these
circumstances.
The IFRS Interpretations Committee discussed a scenario in which an entity
incurs borrowing costs in relation to construction of a multi-unit real estate
development. Units are marketed and sold to individual customers and control
of each unit transfers to the customer over time. Some units are sold before
construction commences and some during construction – i.e. the entity
recognises work in progress for unsold units as inventory. The Committee noted
that any work in progress for unsold units under construction is ready for its
intended sale and therefore not a qualifying asset. This is because the entity
intends to sell the part-constructed units as soon as it finds suitable customers
and control of them will transfer to the customers on entering into a contract.
For example, in April 2019 Developer D undertakes a project to develop a multi-
unit residential building. The construction is expected to take three years – i.e. a
substantial period of time. D borrows funds to finance the development. Under
applicable laws, the land on which the building is being constructed is and will
continue to be owned by the government.
D starts marketing the units and commences the construction of the building.
Successful marketing efforts result in entering into sales contracts with
customers straight away.
D determines that revenue from the sale of individual units will be recognised
over time. As a result, D does not expect to have material inventory or work in
progress on its balance sheet for units sold because control over a specific unit
under construction will, from the point of entering into a sales agreement, be
continuously transferred to each individual customer.
At 31 December 2019, D has completed 10% of the construction work and sold
50% of the units in the building for a total consideration of 100,000. The actual
costs incurred on the construction are 16,000. As a result, D recognises:
– revenue in profit or loss for the units sold of 10,000 (100,000 × 10%);
– construction costs in profit or loss for the units sold of 8,000 (16,000 × 50%); and
– inventory in the statement of financial position for the cost of the unsold
units of 8,000 (16,000 × 50%).
D assesses whether the units under construction meet the definition of a

qualifying asset under the borrowing costs standard.
– Sold units: D determines that the units sold do not meet the definition
of qualifying assets, because any work in progress related to them is
continuously sold in its existing condition to the customers and therefore
recognised in profit or loss as costs are incurred.
– Unsold units: D determines that the unsold units also do not meet the
definition of qualifying assets. This is because the inventory is currently
being marketed, marketing efforts are intended to result in immediate sales
contracts and each unit will be subject to immediate derecognition once
there is a signed contract with a customer – i.e. the units are ready for their
intended sale in their existing condition.
Example 11 – Cost-to-cost measure of progress: Stand-ready

maintenance contract
ABC Corp enters into a maintenance contract with Truck Company T for one
year. ABC provides maintenance services as needed or at specified intervals
for the fleet of trucks. ABC concludes that the nature of its performance
obligation is to stand ready to provide the maintenance services and that the
performance obligation is satisfied over time because T simultaneously receives
and consumes the benefits from the assurance that ABC is available when and
if needed.
Although ABC concludes that its performance obligation is to stand ready

to maintain or service the trucks at any point during the annual period, the
maintenance services do not necessarily occur evenly throughout the year.
Therefore, ABC selects a measure of progress that more closely aligns with its
actual efforts and recognises revenue on an input-based measure that reflects
its performance – e.g. cost-to-cost or labour hours incurred.
Example 12 – Telco: Monthly prepaid wireless contract
Telco M enters into a monthly prepaid contract with wireless Customer B for
200 minutes per month of voice services. B pays 30 per month in advance.
B can use the minutes to make calls at any time during the month. Once the
200 minutes are used, the handset remains connected to the network and
can accept calls. That is, incoming calls are not included in the 200 minutes
per month.
M first concludes that B simultaneously receives and consumes the benefits

from the service as it is provided and therefore the performance obligation is
satisfied over time. Furthermore, M determines that the nature of its promise
is to provide network services to B throughout the month because incoming
calls are not included in the 200 minutes. Consequently, the number of minutes
used does not appear to appropriately depict the satisfaction of that promise.
Instead, the more appropriate measure of progress appears to be time elapsed.
M therefore recognises revenue of 30 evenly throughout the month.
Example 13 – Wireless service contract with rollover minutes
Telco N enters into a two-year wireless contract with Customer C for prepaid
voice services. The voice plan allows C to use 600 minutes each month for
incoming and outgoing calls. After the 600 minutes are used, the handset can
no longer be used to make or receive calls during that month. If C does not
use all of the minutes, then C is able to roll over the unused minutes to the
subsequent month. For the purposes of this example, breakage is ignored.
N concludes that C simultaneously receives and consumes the benefits of the

minutes and therefore the performance obligation is satisfied over time. Due
to C’s ability to roll over the unused minutes each month, progress towards
complete satisfaction of the performance obligation is measured based on the
number of minutes used each month.
Any minutes that are unused at the end of each month will be accounted for
as a contract liability because C pays in advance for the following month’s
600 minutes.
5.3.2 Limitations on applying the units-of-delivery or units-of-

production methods
IFRS 15.B15 An output method may not provide a faithful depiction of performance if the method
selected fails to measure some of the goods or services for which control has
transferred to the customer.
For example, if at the reporting date an entity’s performance has produced work
in progress or finished goods that are controlled by the customer, then using an
output method based on units produced or units delivered would distort the entity’s
performance. This is because it would not recognise revenue for the assets that are
created before delivery or before production is complete but that are controlled by
the customer.
Example 14 – Measure of progress for a performance obligation

involving multiple goods and services
Company U enters into a contract to manufacture and deliver 10 units to

Customer C for 10,000. U assesses that the contract contains a single
performance obligation that is satisfied over time. The cost to manufacture and
deliver the 10 units is estimated to be 8,000.
U considers whether it could apply the units-of-delivery method to measure
progress and determines that it would not be appropriate because it would lead
to material amounts of work in progress being recognised on the balance sheet.
Instead, U determines that an input method based on costs (cost-to-cost) is an
appropriate measure of progress.
The alternative effects on the financial statements are shown below. This
illustration assumes that none of the units has been completed or delivered and
costs of 3,200 have been incurred (i.e. 40% complete) as at the reporting date.
Units-of-delivery Cost-to-cost
method method
Revenue - 4,0001
Costs of goods sold - 3,2002
Gross margin - 800
Work in progress 3,200 -2
Notes
1. Calculated as 10,000 × 40%.
2. Assuming that all materials have been integrated into the units and have no alternative
use.
Design and production services – A units-of-delivery method or a

units-of-production method may not be appropriate
IFRS 15.BC165–BC166 A units-of-delivery or units-of-production method may not be appropriate if

the contract provides both design and production services and they represent
a single performance obligation, because in this case each item produced or
delivered may not transfer an equal amount of value to the customer. These
contracts are common, for example, in the aerospace and defence, contract
manufacturing, engineering and construction industries.
The clarifications provided in the standard on when certain methods for

measuring progress may not be appropriate emphasise the need for an
entity to consider its facts and circumstances and select the method that
depicts its performance and the transfer of control of the goods or services to
the customer.
5.3.3 Adjusting the measure of progress

IFRS 15.B19 An entity applying an input method excludes the effects of any inputs that do not
depict its performance in transferring control of goods or services to the customer.
In particular, when using a cost-based input method – e.g. cost-to-cost – an
adjustment to the measure of progress may be required when an incurred cost:
– does not contribute to an entity’s progress in satisfying the performance
obligation: e.g. unexpected amounts of wasted materials, labour or other
resources (these costs are expensed as they are incurred); or
– is not proportionate to the entity’s progress in satisfying the performance
obligation: e.g. uninstalled materials.
For uninstalled materials, a faithful depiction of performance may be for the entity
to recognise revenue only to the extent of the cost incurred – i.e. at a zero percent
profit margin – if, at contract inception, the entity expects all of the following
conditions to be met:
– the good is not distinct;
– the customer is expected to obtain control of the good significantly earlier than it
receives services related to the good;
– the cost of the transferred good is significant relative to the total expected costs
to completely satisfy the performance obligation; and
– the entity is acting as the principal, but procures the good from a third party and is
not significantly involved in designing and manufacturing the good.
If an entity determines that the cost of uninstalled materials should be excluded

from the measure of progress, then revenue and the related costs are recognised
on transfer of control of the uninstalled materials to the customer. In determining
when control transfers to the customer, it appears that an entity should consider
all relevant indicators, including both point-in-time and over-time indicators (see
Sections 5.2 and 5.4).
Example 15 – Uninstalled materials
IFRS 15.IE95–IE100 In November 2019, Contractor P enters into a lump-sum contract with
Customer Q to refurbish a three-storey building and install new lifts for total
consideration of 5,000. The following facts are relevant.
– The refurbishment service, including the installation of lifts, is a single
performance obligation that is satisfied over time.
– P is not involved in designing or manufacturing the lifts, but is acting as the
principal. Q obtains control of the lifts when they are delivered to the site in
December 2019.
– The lifts are not expected to be installed until June 2020.
– P uses an input method based on costs incurred to measure its progress
towards complete satisfaction of the performance obligation.
The transaction price and expected costs are as follows.
Transaction price 5,000
Costs
Lifts 1,500
Other costs 2,500
Total expected costs 4,000
P concludes that including the costs of procuring the lifts in the measure of
progress would overstate the extent of its performance. Consequently, it
adjusts its measure of progress to exclude these costs from the costs incurred
and from the transaction price, and recognises revenue for the transfer of the
lifts at a zero margin.
By 31 December 2019, other costs of 500 have been incurred (excluding the
lifts) and P therefore determines that its performance is 20% complete (500 /
2,500). Consequently, it recognises revenue of 2,200 (20% × 3,5001 + 1,500)
and costs of 2,000 (500 + 1,500).
Note
1. Calculated as the transaction price of 5,000 less the cost of the lifts of 1,500.
No guidance on the timing and pattern of the recognition of

margin on uninstalled materials
An entity may be entitled to a margin on the uninstalled goods that is clearly

identified in the contract terms or forms part of the overall transaction price. The
standard does not provide guidance on the timing of recognition for this margin
– i.e. whether it is recognised when the materials are installed or incorporated
into the revenue recognition calculation for the remainder of the contract – or
whether the costs are excluded when a measure of progress based on input
costs is used.
IFRS 15.BC171 The Board believes that recognising a contract-wide profit margin before the
goods are installed could overstate the measure of the entity’s performance
and, therefore, revenue. However, requiring an entity to estimate a profit margin
that is different from the contract-wide profit margin could be complex and
could effectively create a performance obligation for goods that are not distinct
(therefore bypassing the requirements on identifying performance obligations).
The adjustment to the cost-to-cost measure of progress for uninstalled
materials is generally intended to apply to a subset of goods in a construction-
type contract – i.e. only to those goods that have a significant cost relative to
the contract and only if the entity is essentially providing a simple procurement
service to the customer.
Judgement will be required in determining whether a customer is obtaining
control of a good ‘significantly’ before receiving services related to the good. In
Example 15 in this chapter, it is unclear whether the same guidance would apply
if the lifts were expected to be installed in January 2020 instead of June 2020.
No detailed guidance on identifying inefficiencies and wasted

materials
IFRS 15.BC176–BC178 Generally, some level of inefficiency, rework or overrun is assumed in a service
or construction contract and an entity contemplates these in the arrangement
fee. Although the standard specifies that unexpected amounts of wasted
materials, labour or other resources should be excluded from a cost-to-cost
measure of progress, it does not provide additional guidance on how to identify
unexpected costs. Judgement is therefore required to distinguish normal
wasted materials or inefficiencies from those that do not depict progress
towards completion.
5.3.4 As-invoiced practical expedient

IFRS 15.B16 As a practical expedient, if an entity has a right to invoice a customer at an amount
that corresponds directly with its performance to date, then it can recognise
revenue at that amount. For example, in a services contract an entity may have the
right to bill a fixed amount for each unit of service provided.
Example 16 – Applying ‘as-invoiced’ practical expedient: Cleaning

services
Cleaning Firm F enters into a contract with Customer C to provide cleaning

services for two years. Fees for the services are based on a fixed hourly rate
F could elect to apply the as-invoiced practical expedient because during the
contract term it has a right to invoice the customer based on its performance to
date – i.e. the number of hours of cleaning services provided to date.
Consideration does not need to be a fixed amount per unit to

recognise revenue at the amount that the entity has a right to
invoice
The as-invoiced practical expedient can apply when the price per unit changes
during the contract. The practical expedient is appropriate when the amount
invoiced for goods or services reasonably represents the value to the customer
of the entity’s performance completed to date.
This can be illustrated using the following examples.
– A contract to purchase electricity at prices that change each year based on
the observable forward market price of electricity: such a contract qualifies
for the practical expedient if the rates per unit reflect the value of the
provision of those units to the customer.
– An IT outsourcing arrangement with a declining unit price that reflects

decreasing levels of effort to complete the tasks: this may be the case
because underlying activities performed at the outset of the contract are
more complex, requiring more experienced (i.e. more costly) personnel than
later activities. There may also be the effect of a learning curve – i.e. in most
circumstances, personnel will become more efficient at performing the
same tasks over time.
Additionally, the following considerations are relevant when assessing whether
the as-invoiced practical expedient can be applied when the price per unit
changes during the contract:
– whether the reasons for the change in the price per unit are substantive: e.g.
for a valid business reason, such as declining costs or changes in the relevant
price index; and
– whether the amount of the change approximates the change in value to
the customer: e.g. by the change in a forward pricing curve in the case of
electricity, a change in the consumer price index (CPI) or a change in labour
data that is relevant to the entity’s costs of providing the goods or services.
Arrangements that include a contractual minimum
It may be unclear whether the as-invoiced practical expedient can be applied

when there is a contractual minimum in an arrangement. This is because
in some cases the price that an entity invoices per unit may not directly
correspond with the value to the customer.
In general, a contractual minimum amount that the entity expects the customer
to easily surpass is not considered a substantive minimum and does not
preclude the use of the as-invoiced practical expedient. This is because the
contractual minimum will not affect the price per unit invoiced because it is
expected to be exceeded.
In contrast, if the contractual minimum is such that there is a reasonable
possibility that the customer will not exceed that minimum, then the practical
expedient does not apply. Instead, the general guidance on determining the
transaction price (including the constraint on variable consideration) applies
and the entity needs to select an appropriate measure of progress for that
performance obligation. This is because when the contractual minimum is not
exceeded, the entity will need to estimate the total number of transactions
and continuously update that amount in order to apply an output method that
depicts progress.
Practical expedient may not be available when a contract includes

a significant up-front fee
The practical expedient is designed to apply when the transaction price varies
in direct proportion to a variable quantity of goods or services transferred to the
customer – i.e. when the transaction price = a fixed per-unit price × a variable
quantity of units (TP = P × Q). In general, when significant fees are paid up-
front, the amount invoiced typically does not correspond directly with the value
to the customer of each incremental good or service that the entity transfers to
the customer and therefore the practical expedient cannot be applied.
In contrast, an up-front fee that reflects the value of other distinct goods or
services transferred to the customer up-front would not preclude the use of the
practical expedient.
Rebates, credits and refunds generally preclude application of the

practical expedient
The presence of variable pricing created by expected refunds, rebates, credits

or tiered pricing generally precludes use of the as-invoiced practical expedient.
This is because the amount that the entity has a right to invoice will not, at least
until the customer achieves the lowest pricing tier, generally reflect the amount
to which the entity expects to be entitled.
The entity also cannot recognise the invoiced amount as revenue when there
is an expectation of later price concessions, which means that the invoiced
amounts do not reflect the value to the customer of the services provided.
Example 17A – Applying ‘as-invoiced’ practical expedient: Change

in rates linked to CPI
Law Firm L enters into a contract with Customer M to provide services related
to a legal case that is expected to take three years to resolve. Fees for the
services are based on hourly rates: starting at 500 per hour for Year 1 and then
adjusting each year by an amount equal to the change in the CPI.
Even though the rate per hour will change in Years 2 and 3, L concludes that
it can still apply the as-invoiced practical expedient because the change in
fee results from cost of service increases commensurate with local inflation.
As a result, L concludes that the fees that it will receive during each period
appropriately reflect the value to the customer of the entity’s performance of
providing legal services in that period.
Example 17B – Applying ‘as-invoiced’ practical expedient: Change

in unit price linked to a fixed change
Modifying Example 17A, Law Firm L charges 500 per hour for the first year and
then adjusts each subsequent year by an amount equal to the greater of the
change in the CPI or 7%. The CPI is currently expected to increase at 2% for the
upcoming year and L’s costs are not expected to increase more than the CPI.
In this example, the price is expected to increase by 7% each year, which is
not consistent with inflation or L’s historical pricing or cost trends. Therefore, L
concludes that it cannot use the as-invoiced practical expedient because the
change is not supported by valid business reasons – e.g. being commensurate
with the increase in costs of providing the service or changes in the CPI.
Example 17C – Applying ‘as-invoiced’ practical expedient: Different

per-unit rates within a performance obligation
Modifying Example 17A, Law Firm L charges different rates per hour over the
contract term based on the type and experience of the professional providing
the service.
For example, the contract provides the following rate card:
– 750 per hour for a partner;
– 500 per hour for a senior associate;
– 300 per hour for an associate; and
– 100 per hour for a paralegal.
These rates reflect observable hourly rates that L charges similar customers
for its professional services on a stand-alone basis. Despite the legal services
being a single performance obligation, L will bill Customer M a different hourly
rate depending on which professional is performing the task generating
the billing.
L concludes that it can apply the practical expedient to recognise revenue
because it has the right to bill at an amount that corresponds directly with its
performance to date. The practical expedient is available despite the different
rates because the differences reflect substantive differences between the value
that each professional provides.
Example 18 – Applying ‘as-invoiced’ practical expedient: Enterprise

service contract with usage fee treated as variable consideration
Telco T enters into a contract with enterprise Customer C to provide call centre
services. These services include providing dedicated infrastructure and staff to
stand ready to answer calls. T receives consideration of 0.50 per minute for each
call answered.
T has separately concluded that its performance obligation is the overall service
of standing ready to provide call centre services each day, rather than each call
answered. Because C simultaneously receives and consumes the benefits of
the service of standing ready each day the service is provided, the performance
obligation is satisfied over time. T also observes that the arrangement meets
the series guidance because each time increment of standing ready to provide
call centre services is distinct, is essentially the same and has the same pattern
of transfer.
Furthermore, T has concluded that the per-minute fee is variable consideration.
In assessing the appropriate pattern of transfer (i.e. measure of progress
in satisfying the performance obligation), T considers whether the variable
consideration needs to be estimated at contract inception.
T expects its performance to be fairly consistent during the contract and
observes that the pricing in this contract is consistent with pricing in similar
contracts with similar customers. T also observes that the variable consideration
for each day (i.e. the per-minute fee) relates to the entity’s effort to satisfy
the promise of standing ready each day. Furthermore, T observes that it has a
right to consideration from C for each minute used (for practical reasons these
amounts may be invoiced on a monthly basis). In addition, T concludes that
the per-minute usage corresponds directly with the value to C of the service
provided by T (i.e. the service of standing ready). Therefore, T concludes that
revenue can be recognised based on the contractual right to bill.
Example 19 – Applying ‘as-invoiced’ practical expedient: Up-front

fees
Technology Company T enters into a contract with Customer C to provide C

with access to its hosted transaction processing application for three years.
T concludes that the software licence is not distinct from the hosting services
and that there is a single performance obligation satisfied over time to provide
transaction processing services. T further concludes that the licence is not
the predominant item in the transaction because the hosting services have a
significant value to C. Therefore, the licence-specific guidance does not apply to
this performance obligation.
T charges C 0.90 per transaction throughout the contract period, billed quarterly.
In addition, C is required to pay a non-refundable up-front fee of 48,000.
T expects transaction-based fees from the arrangement of approximately
480,000.
Judgement is needed to determine whether T can apply the ‘as-invoiced’

practical expedient. If T determines that the up-front fee is significant, then
this suggests that the fees for which T has a right to invoice each period do
not reflect the value of T’s performance for that period and that the practical
expedient does not apply.
If the practical expedient does not apply, then T considers whether it is
appropriate to allocate the transaction processing fees to each period of service.
See Section 4.2.
Example 20 – Applying ‘as-invoiced’ practical expedient: Non-

substantive contractual minimum
Outsourcer Y and Customer C execute a two-year payroll processing

arrangement in which Y processes C’s payroll each week.
The total weekly invoice is calculated based on the number of employee
payments processed each week. C pays 1.00 per transaction throughout the
two years, subject to an annual minimum of 50,000.
Y has a number of contracts similar to the one with C and relevant experience
suggests that it will process more than 150,000 payroll transactions each year
for C. Y includes an annual minimum requirement in its contracts to ensure
a minimum recovery of its fixed costs if all of its customers pay only their
contractual minima annually.
Because Y expects to significantly exceed the annual minimum each year of the
contract, it concludes that the annual minimum is not substantive. Therefore,
Y concludes that the contractual minimum does not preclude use of the as-
invoiced practical expedient.
5.4 Performance obligations satisfied at a point in

time
IFRS 15.32–33 If a performance obligation is not satisfied over time, then an entity recognises
revenue at the point in time at which it transfers control of the good or service to
the customer. An entity has ‘control’ of a good or service when it has the ability to
direct the use of, and obtain substantially all of the remaining benefits from, the good
or service.
5.4 Performance obligations satisfied at a point in time |
The ‘benefits’ of an asset are the potential cash flows – inflows or savings in
outflows – that can be obtained directly or indirectly, including by:
– using the asset to:
- produce goods or provide services (including public services);
- enhance the value of other assets; and
- settle liabilities or reduce expenses;
– selling or exchanging the asset;
– pledging the asset to secure a loan; and
– holding the asset.
IFRS 15.38 The standard includes indicators of when the transfer of control occurs.
Indicators that control has passed include a customer having...
... a present ... risks and

... physical ... accepted
obligation ... legal title rewards of
possession the asset
to pay ownership
Relevant considerations include the following.

– In some cases, possession of legal title is a protective right and may not coincide
with the transfer of control of the goods or services to a customer – e.g. when a
seller retains title solely as protection against the customer’s failure to pay.
– In consignment arrangements (see Section 5.6) and some repurchase
arrangements (see Section 5.5), an entity may have transferred physical
possession but still retain control. Conversely, in bill-and-hold arrangements
(see Section 5.7) an entity may have physical possession of an asset that the
customer controls.
– In some arrangements, a customer may obtain control of an asset before it
has physical possession – e.g. a bank purchasing a fixed amount of gold from a
mine may be able to sell the gold for immediate physical settlement before the
refinement process is completed.
– When evaluating the risks and rewards of ownership, an entity excludes any risks
that give rise to a separate performance obligation in addition to the performance
obligation to transfer the asset. In some cases, the customer may have the
rewards of ownership, but not the risks. This does not necessarily preclude the
customer from having control. An entity considers whether the other indicators
are more relevant and the customer’s ability to direct the use of and obtain
substantially all of the benefits from the asset.
– An entity needs to assess whether it can objectively determine that a good
or service provided to a customer conforms to the specifications agreed in a
contract (see Section 5.8).
Judgement may be required to determine the point in time at

which control transfers
IFRS 15.BC155 The indicators of transfer of control are factors that are often present if
a customer has control of an asset; however, they are not individually
determinative, nor are they a list of conditions that have to be met. The standard
does not suggest that certain indicators should be weighted more heavily
than others, nor does it establish a hierarchy that applies if only some of the
indicators are present. However, it remains possible that in some facts and
circumstances certain indicators will be more relevant than others and so carry
greater weight in the analysis.
Judgement may be required to determine the point in time at which control

transfers. This determination may be particularly challenging when there are
indicators that control has transferred alongside ‘negative’ indicators suggesting
that the entity has not satisfied its performance obligation.
Potential challenges may exist in determining the accounting for

some delivery arrangements
When evaluating at which point in time control transfers to the customer, the
shipping terms of the arrangement are a relevant consideration. Shipping
terms alone do not determine when control transfers – i.e. an entity considers
them along with other indicators of control to assess when the customer has
the ability to direct the use of, and obtain substantially all of the benefits from,
the asset. However, shipping terms often indicate the point in time when the
customer has legal title, the risks and rewards of ownership and a present
obligation to pay – all of which are indicators that control has transferred.
The Incoterms of the International Chamber of Commerce are used frequently
in international purchase-and-sales contracts. They include standard trade
terms such as ‘free on board’ (FOB), ‘cost, insurance and freight’ (CIF) and ‘ex
works’ (EXW). In the case of FOB, when the goods are loaded onto the ship
the customer usually receives the bill of lading and takes over the risk of loss or
damage to the goods. This may indicate that the customer obtains control when
the goods are loaded onto the ship and the bill of lading has been transferred to
the customer.
If control of the goods transfers to the customer before delivery to the final
destination, then an entity considers whether the transportation service is a
distinct performance obligation and, if so, whether it acts as a principal or an
agent for the shipping service (see Section 10.3).
5.5 Repurchase agreements |
When goods are shipped, the risk of loss may often be transferred to a third
party while the goods are in transit. The fact that the seller transfers its risk
of loss to another party (i.e. the third party shipping company or insurance
company) does not mean that the customer has the ability to direct the use
or obtain substantially all of the benefits from the goods or services. An entity
needs to consider this when assessing at which point in time control transfers
to the customer.
If the entity concludes that transfer of control has occurred when the product
is shipped, then it also considers whether its business practices give rise to
a separate performance obligation in addition to the performance obligation
to transfer the product itself – i.e. a stand-ready obligation to cover the risk of
loss if goods are damaged in transit. If a separate performance obligation is
identified, then only the revenue allocated to the sale of the goods is recognised
at the shipping date.
Indirect channels and sell-in vs sell-through
Many entities sell through distributors and resellers. These transactions will
require judgement to determine if the transfer of control occurs on delivery to
the intermediary (sell-in model) or when the good is resold to the end customer
(sell-through model). Entities need to consider the guidance on consignment
sales (see Section 5.6) and variable consideration (see Section 3.1) to determine
which model is appropriate.
5.5 Repurchase agreements
Overview
An entity has executed a repurchase agreement if it sells an asset to a customer

and promises, or has the option, to repurchase it. If the repurchase agreement
meets the definition of a financial instrument, then it is outside the scope of the
standard. If not, then the repurchase agreement is in the scope of the standard
and the accounting for it depends on its type – e.g. a forward, call option or put
option – and on the repurchase price.
IFRS 15.10, B64 The option to repurchase the asset may be in the same contract or in another
contract. A contract creates enforceable rights and obligations and can be written,
oral or implied by an entity’s customary business practices (see Section 1.1).
The repurchased asset may be the asset that was originally sold to the customer,
an asset that is substantially the same as that asset, or another asset of which the
asset that was originally sold is a component.
IFRS 15.BC423 If an entity does not have a contractual right to repurchase a good, but decides to do
so after transferring control of that good to a customer, then this does not constitute
a repurchase arrangement. This is because the customer is not obliged to resell that
good to the entity under the original contract.
A forward or a call option

IFRS 15.B66–B67 If an entity has an obligation (a forward) or a right (a call option) to repurchase an asset,
then a customer does not have control of the asset. This is because the customer is
limited in its ability to direct the use of, and obtain the benefits from, the asset despite
its physical possession. If the entity has an obligation or a right to repurchase the
asset for less than its original sales price, then it accounts for the entire agreement
as a lease, unless the contract is part of a sale-and-leaseback transaction. Conversely,
if the entity has an obligation or a right to repurchase the asset for an amount that is
greater than or equal to the original sales price, then it accounts for the transaction as
a financing arrangement. When comparing the repurchase price with the selling price,
the entity considers the time value of money.
If a repurchase arrangement that would otherwise be accounted for as a lease is

part of a sale-and-leaseback transaction, then the entity continues to recognise the
asset and recognises a financial liability for any consideration received. The entity
accounts for the financial liability under the financial instruments standard.
IFRS 15.B68–B69, B75 In a financing arrangement, the entity continues to recognise the asset and
recognises a financial liability for any consideration received. The difference
between the consideration received from the customer and the amount of
consideration to be paid to the customer is recognised as interest, and processing
or holding costs if applicable. If the option expires unexercised, then the entity
derecognises the liability and the related asset and recognises revenue.
Forward Call option

(a seller’s obligation to repurchase (a seller’s right to repurchase
the asset) the asset)
The customer does not obtain control of the asset
Asset repurchased for less than original selling price?
Yes No
Lease arrangement1 Financing arrangement
1. Unless the contract is part of a sale-and-leaseback transaction.
A put option
IFRS 15.B70–B71
If a customer has a right to require the entity to repurchase the asset (a put option)
at a price that is lower than the original selling price, then at contract inception
the entity assesses whether the customer has a significant economic incentive
to exercise the right. To make this assessment, an entity considers factors
including the:
– relationship of the repurchase price to the expected market value of the asset at
the date of repurchase; and
– amount of time until the right expires.
IFRS 15.B70, B72 If the customer has a significant economic incentive to exercise the put option,
then the entity accounts for the agreement as a lease, unless the contract is part
of a sale-and-leaseback transaction. Conversely, if the customer does not have a
significant economic incentive, then the entity accounts for the agreement as the
sale of a product with a right of return (see Section 10.1).
If a repurchase arrangement that would otherwise be accounted for as a lease is
part of a sale-and-leaseback transaction, then the entity continues to recognise the
asset and recognises a financial liability for any consideration received. The entity
accounts for the financial liability under the financial instruments standard.
IFRS 15.B73, B76 If the repurchase price of the asset is equal to or greater than the original selling
price and is more than the expected market value of the asset, then the entity
accounts for the contract as a financing arrangement. In this case, if the option
expires unexercised, then the entity derecognises the liability and the related asset
and recognises revenue at the date on which the option expires.
IFRS 15.B75 When comparing the repurchase price with the selling price, the entity considers
the time value of money.
Put option
(a customer’s right to require the seller to repurchase the asset)
Repurchase price equal to or greater than original

selling price?
Yes No
Repurchase price greater No Customer has significant

than expected market value economic incentive to exercise
of asset? the put option?
Yes Yes No
Financing arrangement 1 Sale with a right

Lease
of return
1. Unless the contract is part of a sale-and-leaseback transaction.
Example 21 – Handset trade-in
Telco T enters into a 24-month wireless service contract with Customer C. At

contract inception, T transfers to C a handset for 600, together with a right to
trade in that handset for 100 at the end of the service contract. The stand-alone
selling price of the handset at contract inception is 600. T expects the handset
market value to be 150 in 24 months.
T’s obligation to repurchase the handset at the customer’s option is a put
option. T assesses, at contract inception, whether C has a significant economic
incentive to exercise the put option, to determine the accounting for the
transfer of the handset.
T concludes that C does not have a significant economic incentive to exercise
the put option because the repurchase price of 100 is lower than the expected
market value of 150. Additionally, customers usually have easy access to the
second-hand market to resell similar phones. T determines that there are no
other relevant factors to consider when assessing whether C has a significant
economic incentive to exercise the put option. Consequently, T concludes that
control of the handset transfers to C because C is not limited in its ability to
direct the use of, and obtain substantially all of the remaining benefits from,
the handset.
T therefore accounts for the transaction as a sale with a right of return (see
Section 10.1).
An approach that focuses on the repurchase price
The standard includes guidance on the nature of the repurchase right or

obligation and the repurchase price relative to the original selling price.
Judgement will be required to determine whether a customer with a put option
has a significant economic incentive to exercise its right. This determination is
made at contract inception and is not updated for subsequent changes in asset
prices. Historical customer behaviour in similar arrangements will be relevant to
this determination.
Requirements for repurchase agreements not applicable to

arrangements with a guaranteed resale amount
IFRS 15.BC431 The Board observed that although the cash flows of an agreement with a
guaranteed minimum resale value may be similar to those of an agreement with
a put option, the customer’s ability to control the asset is different and therefore
the recognition of revenue may differ. This is because if a customer has a
significant economic incentive to exercise a put option, then it is restricted in
its ability to consume, modify or sell the asset. This would not be the case if the
entity had instead guaranteed a minimum amount of resale proceeds.
This could result in different accounting for arrangements with similar expected
cash flows.
Conditional forwards or call options
IFRS 15.BC424 In some cases, a forward contract or a call option may be conditional on a future
event. Although all of the facts and circumstances need to be evaluated for
each arrangement, treating certain conditional forwards or call options as rights
of return (see Section 10.1) may be more consistent with the economics of
these transactions. In these cases, it is appropriate to apply the principles for
recognising and measuring variable consideration from a right-of-return provision,
rather than accounting for the arrangement as a lease or a financing transaction.
For example, some perishable goods manufacturers include provisions in their
agreements with customers under which they have the right to remove and
replace out-of-date products to ensure that the end consumers receive the
product quality and freshness that they expect. Under these circumstances, the
manufacturer does not have the unconditional right to repurchase the products
at any time. The product must be past its sell-by date for the manufacturer to
apply this right.
In this example, the existence of a conditional call option does not restrict
the customer’s ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset unless and until the conditional event
occurs, because the manufacturer has no right to repurchase the product if
the sell-by date has not passed. Consequently, the customer has control over
the asset until the contingent event occurs. Therefore, in this example the
manufacturer accounts for the arrangement as a sale with a right of return.
Right of first refusal
IFRS 15.B66, BC423 A seller may retain a right of a first refusal for future sale of the purchased asset
by the customer. This allows the seller to repurchase the asset at the same price
as a third party agrees to pay to the customer for the sale of the asset.
This right is not a call or a put option because it does not prevent the customer
from controlling the asset. Accordingly, it does not generally constitute a
repurchase agreement and therefore does not affect revenue recognition by the
seller. Additionally, the customer has no right to return the asset to the seller so
the returns are not estimated.
5.6 Consignment arrangements

IFRS 15.B77 An entity may deliver goods to another party but retain control of the goods – e.g.
it may deliver a product to a dealer or distributor for sale to an end customer. These
types of arrangements are called ‘consignment arrangements’ and do not allow the
entity to recognise revenue on delivery of the products to the intermediary.
IFRS 15.B78 The standard provides indicators that an arrangement is a consignment
arrangement as follows.
Indicators of a consignment arrangement
The entity controls

the product until a The entity is able The dealer does not
specified event occurs to require the return of have an unconditional
(e.g. the sale of the product or transfer obligation to pay for
the product to a the product to a third the products, although
customer of the dealer) party – e.g. another it might be required to
or until a specified dealer pay a deposit
period expires
When is revenue recognised?
While the entity retains

control of the product...

Performance obligation is not satisfied
and revenue is not recognised

When control transfers to the Performance obligation is satisfied
intermediary or end customer... and revenue is recognised
5.6 Consignment arrangements |
Example 22 – Retail: Consignment arrangement
Manufacturer M enters into a 60-day consignment contract to ship 1,000

dresses to Retailer R’s stores. R is obliged to pay M 20 per dress when the
dress is sold to an end customer. During the consignment period, M has the
contractual right to require R to either return the dresses or transfer them to
another retailer. M is also required to accept the return of the inventory.
M determines that control has not transferred to R on delivery, for the
following reasons:
– R does not have an unconditional obligation to pay for the dresses until they
have been sold to an end customer;
– M is able to require that the dresses be transferred to another retailer at any
time before R sells them to an end customer; and
– M is able to require the return of the dresses or transfer them to another
retailer.
M determines that control of the dresses transfers when they are sold to an
end customer – i.e. when R has an unconditional obligation to pay M and can no
longer return or otherwise transfer the dresses. M recognises revenue as the
dresses are sold to the end customer.
Example 23 – Automotive: Consignment arrangement
Carmaker C requires Automotive Supplier S to deliver a predetermined number

of brake lightbulbs to C’s warehouse based on a forecast production plan.
However, legal title over the lightbulbs and a right to payment arise only when
the parts are retrieved from the warehouse and moved to C’s assembly line.
Brake lightbulbs produced by S can also be sold to other carmakers and S has
the contractual right to require C to return the parts or deliver them to another
carmaker. S is also required to accept any excess lightbulbs returned by C.
S determines that control over the lightbulbs has not transferred to C on delivery
to C’s warehouse because:
– C does not have an unconditional obligation to pay for the lightbulbs until they
have been moved to its assembly line; and
– S is able to require that the lightbulbs be transferred to another carmaker any
time before C installs them in its cars.
S determines that control of the lightbulbs transfers when they are moved to C’s
assembly line – i.e. when C has an unconditional obligation to pay S and can no
longer be asked to return or transfer the goods.
Example 24 – Automotive: Not a consignment arrangement
Carmaker D enters into a contract with Automotive Supplier S to deliver

windscreens for D’s cars. According to the contract, S is required to maintain a
minimum number of windscreens in D’s warehouse during the contract term.
Once they have been delivered, S cannot access the windscreens (other than
for stocktaking). It also has no right to require the windscreens to be returned or
redirected to another carmaker.
The price of the windscreens is determined when they are delivered to D’s
warehouse. S has a right to payment for the windscreens either when they are
moved to D’s assembly line or within six weeks of delivery, whichever is earlier.
While they are stored at D’s warehouse, D bears any insurance fees and storage
costs. In addition, it is liable for the risk of loss, theft or damage. However, S
retains legal title to the windscreens until payment is received.
According to the relevant legal framework in D’s jurisdiction, goods are deemed
to be accepted if D does not claim otherwise without an undue delay.
S concludes that the arrangement with D is not a consignment arrangement,
because:
– it is unable to require D to return the windscreens or to transfer them to a
third party; and
– S has an unconditional right to payment for the windscreens once they are
delivered that is dependent only on the passage of time. D’s actions can only
influence the timing of the payment.
Judgement is required to determine the point in time at which control over the
windscreens is transferred to D. Under this fact pattern, S notes that:
– it is unable to direct the windscreens to another use once they have been
delivered;
– it has an unconditional right to payment for windscreens (see above);
– even though it retains legal title to the windscreens, this is a protective
measure against D’s failure to pay;
– it has transferred physical possession of the windscreens to D;
– it has transferred the significant risks and rewards of ownership of the
windscreens – i.e. the price risk, demand risk and inventory risk; and
– under the local law, D is deemed to accept the windscreens delivered to its
warehouse if it does not claim otherwise shortly after delivery.
Therefore, S concludes that control over the parts has been transferred to D on
delivery to its warehouse.
5.7 Bill-and-hold arrangements |
5.7 Bill-and-hold arrangements

IFRS 15.B79 Bill-and-hold arrangements occur when an entity bills a customer for a product
that it transfers at a point in time, but retains physical possession of the product
until it is transferred to the customer at a future point in time. This might occur
to accommodate a customer’s lack of available space for the product or delays in
production schedules.
IFRS 15.B80–B81 To determine when to recognise revenue, an entity needs to determine when
the customer obtains control of the product. Generally, this occurs at shipment or
delivery to the customer, depending on the contract terms (for discussion of the
indicators for transfer of control at a point in time, see Section 5.4). The standard
provides criteria that have to be met for a customer to obtain control of a product in
a bill-and-hold arrangement. These are illustrated below.
Evaluating when a customer obtains control of a product in a

bill-and-hold arrangement that satisfies the criteria in Step 1
Is the reason for the bill-and-hold No

arrangement substantive?
Yes
Has the product been No

identified separately as belonging The customer has not
to the customer? obtained control. The
entity may not
Yes recognise revenue
until it concludes that
the customer has
Is the product ready for physical No obtained control
transfer to the customer? of the product
Yes
Does the entity have the ability Yes

to use the product or direct it to
another customer?
No
The customer has
obtained control. The
entity recognises
revenue on a
bill-and-hold basis
IFRS 15.B82 If an entity concludes that it is appropriate to recognise revenue for a bill-and-
hold arrangement, then it is also providing a custodial service to the customer,
which may constitute a separate performance obligation to which a portion of the
transaction price is allocated.
Example 25 – Bill-and-hold arrangement
Company C enters into a contract to sell equipment to Customer D, who is

awaiting completion of a manufacturing facility and requests that C hold the
equipment until the manufacturing facility is completed.
C bills and collects the non-refundable transaction price from D and agrees to
hold the equipment until D requests delivery. The transaction price includes
appropriate consideration for C to hold the equipment indefinitely. The
equipment is complete and segregated from C’s inventory and is ready for
shipment. C cannot use the equipment or sell it to another customer. D has
requested that the delivery be delayed, with no specified delivery date.
C concludes that D’s request for the bill-and-hold basis is substantive. It also
concludes that control of the equipment has transferred to D and that it will
recognise revenue on a bill-and-hold basis even though D has not specified a
delivery date.
The obligation to warehouse the goods on behalf of D represents a separate
performance obligation. C needs to estimate the stand-alone selling price of
the warehousing performance obligation based on its estimate of how long the
warehousing service will be provided. C defers the amount of the transaction
price allocated to the warehousing obligation and recognises it over time as the
warehousing services are provided.
5.8 Customer acceptance |
5.8 Customer acceptance

IFRS 15.38(e) To determine the point in time at which a customer obtains control for point-in-time
performance obligations (and therefore the performance obligations are satisfied),
an entity considers several indicators of the transfer of control, including whether
the customer has accepted the goods or services.
IFRS 15.B83 The customer acceptance clauses included in some contracts are intended to
ensure the customer’s satisfaction with the goods or services promised in the
contract. The table below illustrates examples of customer acceptance clauses.
If the entity… Then… For example…
IFRS 15.B84 Can objectively verify Customer acceptance The customer

that the goods or would be a formality, acceptance clause
services comply with and revenue could is based on meeting
the specifications be recognised before objective size and
underlying acceptance explicit acceptance weight specifications
IFRS 15.B85 Cannot objectively It is unlikely that The customer

determine whether the entity would be acceptance clause is
the specifications have able to conclude based on a modified
been met that the customer product functioning in
has obtained control the customer’s new
before formal production line
customer acceptance
IFRS 15.B86 Delivers products Control of the product The customer

for trial or evaluation is not transferred to acceptance clause
purposes and the the customer until specifies that the
customer is not either the customer customer may use
committed to paying any accepts the product or prototype equipment
consideration until the the trial period lapses for a specified period
trial period lapses of time
IFRS 15.B84 An entity’s experience with similar contracts may provide evidence that goods or
services transferred to the customer are based on the agreed specifications.
For further discussion on the accounting for consignment arrangements that may
have attributes similar to customer acceptance clauses, see Section 5.6.
6 Scope
Overview
The standard applies to contracts to deliver goods or services to a customer.

Its guidance applies to contracts with customers in all industries. However, a
contract with a customer is outside the scope of the revenue standard if it falls
in the scope of other specific requirements.
In some cases, the revenue standard is applied to part of a contract or, in certain
circumstances, to a portfolio of contracts.
6.1 In scope
IFRS 15.6 A ‘customer’ is a party that has contracted with an entity to obtain goods or services
that are an output of the entity’s ordinary activities in exchange for consideration.
Contract
Goods and services
Entity Customer
Consideration
Example 1 – Identifying in-scope contracts
Company X is in the business of buying and selling commercial property. It

sells a property to Purchaser Y. This transaction is in the scope of the revenue
standard because Y has entered into a contract to purchase an output of X’s
ordinary activities and is therefore considered a customer of X.
Conversely, if X was a manufacturing entity selling its corporate headquarters to
Y, then the transaction would not be a contract with a customer because selling
real estate is not an ordinary activity of X. For further discussion on which parts
of the model apply to contracts with a non-customer, see Section 10.7.
6 Scope | 163
6.2 Out of scope |
Determining whether an activity is ‘ordinary’ may require

judgement
IFRS 15.BC52–BC53 The definition of a customer focuses on an entity’s ordinary activities.

However, ‘ordinary activities’ are not defined. In some cases, the assessment
of whether a good or service is an output of the entity’s ordinary activity may
be straightforward – e.g. a retailer selling goods to its customers. However, in
other cases the assessment may require judgement – e.g. if a retailer enters
into a co-branding arrangement with a bank and provides marketing services,
judgement may be required to assess whether the bank is the customer of the
retailer for the marketing services.
Sales of by-products may be in the scope of the standard
An entity may produce by-products as part of its operations. In these cases,

an entity needs to evaluate all facts and circumstances to determine the
appropriate guidance to apply.
If a by-product is a routine output of the primary manufacturing process and
its sales are part of ongoing operations, then the transaction is often in the
scope of the revenue standard – i.e. the sale is accounted for and presented
as revenue.
Conversely, if on rare occasions an entity sells scrap or a by-product that is not
an output of its primary manufacturing process, then these transactions may
be outside the scope of the revenue standard – i.e. the transactions would be
accounted for and presented as other income.
6.2 Out of scope

IFRS 15.5 The standard does not apply to:
– lease contracts;
– insurance contracts;
– financial instruments and other contractual rights or obligations in the scope of
other specific guidance;
– guarantees (other than product or service warranties); and
– non-monetary exchanges between entities in the same line of business that
facilitate sales to customers other than the parties to the exchange.
Example 2 – Non-monetary exchanges between telecom

companies
Telco T and Telco B provide wireless services such as voice, data and text to their
customers. However, they maintain and operate networks in different regions.
T and B have agreed to exchange airtime and network capacity to ensure that
their customers always have access to wireless services. The exchange is
expected to be approximately equal and the contract requires no payment
between the entities. Also, T and B have concluded that the exchange does not
include a sale of property, plant and equipment or a lease.
This transaction is outside the scope of the revenue standard because T and
B have entered into an agreement that is a non-monetary exchange between
entities in the same line of business to facilitate sales to their customers.
Because this transaction is outside the scope of the revenue standard for both
T and B, it is excluded from the disclosures required by the revenue standard,
including the presentation of revenue from contracts with customers.
Product and service warranties – Revenue vs provisions standard
IFRS 15.B28–B33 Entities with product or service warranties apply the guidance in the revenue
standard (see Section 10.2) to determine whether to account for them under
the revenue or the provisions standard.
Contributions in non-exchange transactions are outside the scope

of the standard
CF4.68, IFRS 15.BC28 A ‘contribution’ is a non-reciprocal transfer of cash or other assets, rather than an
exchange transaction – i.e. it is not given in exchange for goods or services that
are an output of the entity’s ordinary activities. Accordingly, contributions are not
transactions with a customer, because a customer is defined in the standard as
a party that has contracted with an entity to obtain goods or services that are an
output of the entity’s ordinary activities in exchange for consideration. Therefore,
non-reciprocal contributions are not in the scope of the standard.
A not-for-profit entity may enter into some transactions that are contributions
and others that are not. A not-for-profit entity therefore needs to evaluate which,
if any, of its transactions are either fully or partially in the scope of the standard.
6 Scope | 165
6.3 Partially in scope |
Settlement of imbalances in non-monetary exchanges
IFRS 15.5(d), BC58 Some exchanges between entities in the same line of business that facilitate
sales to customers may involve similar goods or services of unequal value –
e.g. there may be a time gap that affects the pricing of the good or the goods
may differ in specification. In these cases, entities may settle the accumulated
imbalances in cash periodically – e.g. on a quarterly or annual basis. The
imbalance settled in cash often represents a small proportion of the gross
exchange under the arrangement.
The fact that the imbalances may be settled in cash does not necessarily cause
the exchange to become ‘monetary’ and result in the transaction being in the
scope of the standard.
An entity needs to evaluate all facts and circumstances of the transaction,
including the nature and the objective of the exchange, in determining whether
it falls in the scope of the standard. In making this assessment, the entity
also considers the relevance of the resulting information to the users of the
financial statements.
6.3 Partially in scope

IFRS 15.7 A contract with a customer may be partially in the scope of the revenue standard
and partially in the scope of other accounting guidance. If the other accounting
guidance specifies how to separate and/or initially measure one or more parts of
a contract, then an entity first applies those requirements. Otherwise, the entity
applies the revenue standard to separate and/or initially measure the separately
identified parts of the contract.
The following flowchart highlights the key considerations when determining the
accounting for a contract that is partially in the scope of the revenue standard.
Is the contract fully in the Yes

scope of other accounting Apply that other guidance
guidance?
No
Does that standard

Is the contract partially Yes have separation and/or
in the scope of other
initial measurement
accounting guidance?
guidance that applies?
No Yes
Apply the guidance in Apply that guidance to

the revenue standard to separate and/or
separate and/or initially measure
No initially measure the contract
the contract
Exclude the amount

initially measured
under that guidance
from the transaction
price
Apply the revenue standard
to the contract (or the part
of the contract in its scope)
IFRS 15.6 The revenue standard excludes from its scope contracts with a collaborator or
a partner that are not customers, but rather share with the entity the risks and
rewards of participating in an activity or process. However, a contract with a
collaborator or a partner is in the scope of the revenue standard if the counterparty
meets the definition of a customer for part or all of the arrangement. Accordingly, a
contract with a customer may be part of an overall collaborative arrangement and
the revenue standard is applied to that part.
6 Scope | 167
Example 3 – Zero residual amount after applying other accounting

requirements
IFRS 9.B5.4.3 Bank B enters into a contract with a customer in which it receives a cash
deposit and provides associated deposit services and treasury services for
no additional charge. The cash deposit is a liability in the scope of the financial
instruments standard. B first applies the initial recognition and measurement
requirements in the financial instruments standard to measure the cash
deposit. B then allocates the residual amount to the associated deposit services
and treasury services and accounts for it under the revenue standard. Because
the amount received for the cash deposit is recognised as a deposit liability,
there are no remaining amounts to allocate to the associated deposit services
and treasury services.
Modifying the fact pattern, if the arrangement included a periodic service fee,
then a similar analysis would be performed. However, depending on the facts
and circumstances, all or part of an ongoing fee that is charged on a monthly or
annual basis is likely to be in the scope of the revenue standard.
Example 4 – Collaborative agreement
Biotech X has an arrangement with Pharma Y to research, develop and

commercialise a drug candidate. X is responsible for the research and
development (R&D) activities and Y is responsible for the commercialisation of
the drug candidate. Both X and Y agree to participate equally in the results of the
R&D and commercialisation activities.
Because the parties are active participants and share in the risks and rewards of
the end product – i.e. the drug – this is a collaborative arrangement. However,
there may be a revenue contract within the overall collaborative arrangement.
In some cases, there will be little or no residual amount

remaining to allocate
For some arrangements, as illustrated in Example 3 in this chapter,

after applying the other accounting guidance on separation and/or initial
measurement, there may be little or no amount left to allocate to components
of the contract that are in the scope of the revenue standard.
A counterparty may be both a collaborator and a customer
IFRS 15.BC55 The counterparty may be a collaborator for certain parts of the arrangement and
a customer for other parts of it. It will be important for an entity that engages
in collaborative arrangements to analyse whether the other parties to these
arrangements are customers for some activities, and therefore whether
these activities are revenue-generating. Making this assessment will require
judgement and consideration of all applicable facts and circumstances of
the arrangement.
Rate-regulated entities applying specific requirements do not

apply the standard to movements in regulatory deferral account
balances
IFRS 14 The revenue standard applies to the normal operations of rate-regulated entities
– e.g. the sale of electricity, gas or water to customers in the course of the
entity’s ordinary activities.
Some entities that are subject to rate regulation may be eligible to apply the
standard on regulatory deferral accounts. If so, then they apply that standard
– rather than the revenue standard – to the movements in the regulatory
account balances.
Parts of the standard apply to sales of non-financial assets
IFRS 15.BC57 Parts of the revenue standard also apply to sales of intangible assets, property,
plant and equipment and investment property, including real estate in
transactions outside the ordinary course of business. For further discussion
on sales of non-financial assets outside the ordinary course of business, see
Section 10.7.
Financial services fees – Revenue vs financial instruments

standard
IFRS 9.B5.4.2–B5.4.3 The financial instruments standard includes guidance that specifies which
types of financial services fees are included in the measurement of a
financial instrument and which types of fees are accounted for under the
revenue standard.
6 Scope | 169
Fees that are an integral part of the effective interest rate of a financial
instrument and fees on an instrument measured at fair value through profit or
loss (FVTPL) are in the scope of the financial instruments standard. Examples
of financial service fees that are not an integral part of the effective yield of an
associated financial instrument and are therefore recognised under the revenue
standard include:
– fees charged for servicing a loan;
– commitment fees to originate loans when it is unlikely that a specific lending
arrangement will be entered into and the loan commitment is not measured
at FVTPL;
– loan syndication fees received by an entity that arranges a loan and retains
no part of the loan package for itself (or retains a part at the same effective
interest rate for comparable risk as other participants);
– a commission earned on the allotment of shares to a client;
– placement fees for arranging a loan; and
– investment management fees.
Determining the contract term when a contract contains lease

and non-lease components
IFRS 15.7 When a contract contains lease and non-lease components, under the leases
standard a lessor allocates the consideration in the contract applying Step 4 of
the revenue standard (see Chapter 4). A question may arise over whether to
allocate the consideration based on the lease term as determined under the
leases standard (i.e. including optional renewal periods over which the lessee
is reasonably certain to extend) or based on the contract term as determined
under the revenue standard (i.e. only including periods during which the parties
have presently enforceable rights and obligations (see Section 1.2)). In these
cases, it appears that an entity should allocate the consideration to each
component based on the lease term determined under the leases standard.
We believe that an entity should also consider whether any renewal options for
the non-lease component give rise to a material right (see Section 10.4).
Example 5 – Telco: Partially in-scope transaction
IFRS 15.7(a), 16.17 Telco T enters into a contract that includes a promise to provide telecom
equipment and services to Customer C. T first applies the leasing standard to
assess whether the arrangement contains a lease.
If T concludes that the use of the equipment represents a lease, then the
equipment will be accounted for under the leasing standard. Because the
leasing standard contains guidance on how to identify a lease component and
allocate the transaction price between lease and non-lease components, T first
applies that guidance.
If T concludes that the equipment is not leased, then the entire contract will be
accounted for under the revenue standard. In applying the revenue standard, T
would follow all of the relevant revenue guidance, including the requirement to
determine whether the equipment is distinct from the service (see Chapter 2).
Example 6 – Investment contracts that are not insurance contracts
Insurer X enters into an investment contract with a customer. Under the

terms of the contract, X is obliged to return the underlying investment to the
customer, net of management services fees. The management fee is set as a
fixed percentage of the investment value.
IFRS 4.A, IAS 32.11 X concludes that the contract does not transfer significant insurance risk
and is therefore not an insurance contract. X also identifies that the contract
includes two components: a financial liability to the customer for the return of
the underlying investment amount and an investment management service
component.
Because the contract includes a financial liability, X first applies the initial
recognition and measurement requirements in the financial instruments
standard to measure it. X then allocates the residual amount to the investment
management services. X determines that the initial investment received is the
fair value of the financial liability. Therefore, there is no remaining amount to
allocate to the investment management services at inception of the contract.
Subsequently, X measures the financial liability in accordance with the financial
instruments standard and accounts for all of the management service fee
charged under the contract in accordance with the revenue standard.
Example 7 – Media: Collaborative arrangement
Studio B and Television Channel C enter into an arrangement to develop a

new television show. Under the agreement, B and C will jointly decide on the
script, budget and number of episodes. C receives the licence to the show
for its jurisdiction and B is able to sell the rights to television channels in other
jurisdictions. C will reimburse B for 50% of the costs incurred during production
and make a fixed payment of 5,000 to B when the television series is complete.
In this example, B needs to analyse carefully whether all or any part of the
arrangement with C is in the scope of the revenue standard. For example, B
considers whether the final fixed payment is part of a collaborative arrangement
or represents a payment for a licence in the scope of the standard.
6 Scope | 171
6.4 Portfolio approach |
Example 8 – Automotive: Collaborative agreement
Automotive Supplier S enters into an arrangement with Carmaker D to develop

a new technology for D’s cars. Both S and D agree to participate equally in the
costs and results of the engineering and development activities. Under the
arrangement, S will also produce 100 units of the part developed for payment
of 10,000. Because the parties are active participants and share in the risks and
rewards of the engineering and development activities – i.e. the technology
– part of the contract related to the engineering and development could be a
collaborative arrangement. However, there is also a revenue contract to produce
a series of parts within the overall agreement, which is accounted for under the
revenue standard.
6.4 Portfolio approach

IFRS 15.4 The standard is generally applied to an individual contract with a customer.
However, as a practical expedient an entity may apply the revenue model to a
portfolio of contracts with similar characteristics if the entity reasonably expects
that the financial statement effects of applying the revenue standard to the
individual contracts within that portfolio would not differ materially.
Example 9 – Portfolio approach applied to costs
In April 2019, Cable Store C sold 100 cable television contracts. C employs
several sales agents who receive a bonus of 10 for each contract that they
obtain. C determines that each bonus constitutes a cost of obtaining a contract
(see Section 7.1) and should be capitalised and amortised over the life of that
underlying contract and any related anticipated renewal (see Section 7.3).
C determines that the portfolio approach is appropriate because the costs are
all related to obtaining a contract and the characteristics of the contracts are
similar. The amortisation period for the asset recognised related to these costs
is expected to be similar for the 100 contracts (see Section 7.3). Additionally,
C documents that the portfolio approach does not materially differ from the
contract-by-contract approach. Instead of recording and monitoring 100 assets
of 10 each, C records a portfolio asset of 1,000 for the month of April 2019
Entities need to consider costs vs benefits of portfolio approach
Although the portfolio approach may be more cost effective than applying the
standard on an individual contract basis, it is not clear how much effort may be
needed to:
– evaluate which similar characteristics constitute a portfolio: e.g. the effect of
different offerings, periods of time or geographic locations;
– assess when the portfolio approach may be appropriate; and
– develop the process and controls needed to account for the portfolio.
No specific guidance on assessing whether portfolio approach

can be used
IFRS 15.IE110–IE115, IE267–IE270 The portfolio approach can be applied to both contract revenues and costs.
The standard includes illustrative examples in which the portfolio approach
is applied, including for rights of return and breakage. However, it does not
provide specific guidance on how an entity should assess whether the results
of a portfolio approach would differ materially from applying the standard on a
contract-by-contract basis.
7 Contract costs | 173
7.1 Costs of obtaining a contract |
7 Contract costs
Overview
The standard does not seek to provide comprehensive guidance on the

accounting for contract costs. In many cases, entities apply the cost guidance
under other standards – e.g. the inventory standard. However, the revenue
standard does include specific guidance on the following areas.
Costs of obtaining a contract Costs of fulfilling a contract

Contract
costs
Amortisation of assets Impairment of assets
arising from costs to obtain arising from costs to obtain
or fulfil a contract or fulfil a contract
7.1 Costs of obtaining a contract

IFRS 15.91–92 An entity capitalises incremental costs to obtain a contract with a customer – e.g.
sales commissions – if it expects to recover those costs.
IFRS 15.94 However, as a practical expedient an entity is not required to capitalise the
incremental costs to obtain a contract if the amortisation period for the asset is
one year or less.
IFRS 15.93 Costs that will be incurred regardless of whether the contract is obtained – including
costs that are incremental to trying to obtain a contract – are expensed as they are
incurred, unless they meet the criteria to be capitalised as fulfilment costs (see
Section 7.2). An example is costs to prepare a bid, which are incurred even if the
entity does not obtain the contract.
Would costs be incurred No Are the incremental costs

regardless of whether the expected to be recovered?
contract is obtained?
Yes
Yes
Do they meet the criteria Yes

to be capitalised as Capitalise costs
fulfilment costs?
No
Expense costs as they No

are incurred
Example 1 – Costs incurred to obtain a contract: Sales

commissions to employees
IFRS 15.IE189–IE191 Consulting Company E provides consulting services to customers. Following a

competitive tender process, E wins a contract to provide consulting services to
Customer C. E incurs the following costs to obtain the contract.
External legal fees for due diligence 15

Travel costs to deliver proposal 25
Commissions to sales employees and related payroll taxes 10
Total costs incurred 50
The commissions payable to sales employees and related payroll taxes are
an incremental cost to obtain the contract, because they are payable only on
successfully obtaining the contract. E therefore recognises an asset for the
sales commissions of 10, subject to recoverability.
By contrast, although the external legal fees and travel costs are incremental
costs, they are costs associated with trying to obtain the contract. Therefore,
they are incurred even if the contract is not obtained. Consequently, E expenses
the legal fees and travel costs as they are incurred.
Practical expedient applies if the amortisation period is less than

one year
IFRS 15.94 The practical expedient allowing entities not to capitalise the incremental costs
to obtain a contract offers potential relief for an entity that enters into contracts
of relatively short duration without a significant expectation of renewals.
However, it may reduce comparability between entities.
Whether to use the practical expedient is an accounting policy choice, which
can be made when the amortisation period associated with the asset that
would otherwise have been recognised is one year or less. It is important to
note that the amortisation period may be longer than the initial contract period
because the entity is required to take into account expected renewals when
determining the amortisation period. Determining the amortisation period can
be particularly challenging when the entity also pays commissions for renewal
contracts. For discussion of the amortisation period, see Section 7.3.
Consistent with other accounting policy choices for which the relevant standard
does not specify the level at which the accounting policy choice is applied, the
practical expedient related to contract costs is applied on an entity-wide basis
across all of its business units or segments.
The assessment of whether the practical expedient applies is made at the
contract level. If a contract includes multiple performance obligations, and one
or more of them will be satisfied beyond one year, then the practical expedient
will not usually apply. This will be the case when the asset relates to all of the
goods and services in the contract and more than one performance obligation is
present, which means that the amortisation period of the capitalised costs will
be longer than a year.
For discussion of the amortisation period, see Section 7.3.
Capitalising commission when associated liability is accrued
In some cases, an additional commission may be payable, or the original

commission amount adjusted, at a future date. Examples include commissions:
– paid for renewal of the contract;
– earned on contract modifications;
– contingent on future events;
– subject to claw-back; and
– that are tiered, subject to a threshold.
In these cases, an entity considers the enforceable rights and obligations

created by the arrangement to determine when the liability is accrued and
whether to capitalise a commission, and in what amount. Consider these
examples.
– If an entity pays commission of 100 on commencement of a contract with
a non-cancellable two-year term, and agrees to pay further commission of
100 if the customer renews the contract at the end of two years, then the
entity generally capitalises only the initial commission of 100 on contract
commencement. The entity capitalises the second commission of 100 only
when the customer renews the contract. This is because the contract creates
enforceable rights and obligations for both parties only for the initial contract
period of two years and the entity does not accrue the second commission
payment until it has a present obligation.
– If an entity pays commission of 100 on commencement of a contract with
a non-cancellable two-year term and agrees to pay additional commission
of 100 on the first anniversary of the contract, then the entity generally
capitalises 200 on contract commencement. This is because the contract
creates enforceable rights and obligations for both parties for the contract
period of two years. Also, the entity accrues the second payment because
it has a present obligation and its payment depends only on the passage
of time.
In more complex scenarios, an entity focuses on whether its obligation to pay a
commission meets the definition of a liability. This will be particularly important
when considering commission structures that include thresholds – e.g. a
commission amount is payable only if cumulative sales within a given period
exceed a specified amount or the commission rate varies with cumulative sales.
In general, if an entity recognises a liability to pay commission that qualifies for
recognition as the cost of obtaining a contract, then the entity recognises an
asset at the same time.
Judgement required for multiple-tier commissions
Some entities pay sales commissions on a multiple-tier system, in which the

salesperson receives commission on all contracts executed with customers,
and their direct supervisor receives commission based on the sales of the
employees who report to them. An entity uses judgement when determining
whether the supervisor’s commission is incremental to obtaining a specific
contract or contracts. The incremental cost is the amount of acquisition cost
that can be directly attributable to an identified contract or contracts.

commissions to employees vs advertising
Telco E enters into a two-year wireless contract with Customer C that includes
voice and data services. The contract is signed at one of E’s stores and Sales
Employee S receives a commission of 30 when C signs the contract. E has
also incurred costs related to a two-week advertising campaign. On signing the
contract, C indicates that he came into the store in response to this advertising
campaign.
The commission paid to S is an incremental cost to obtain the contract with C
because it is payable only on successfully obtaining the contract. Because the
contract term is more than 12 months, the practical expedient does not apply.
E therefore capitalises the sales commission of 30 as a cost of obtaining the
contract, subject to recoverability. For discussion of the amortisation period, see
Section 7.3.
In contrast, the advertising costs, although they are associated with trying to
obtain the contract, are not incremental costs of obtaining the contract. That
is, the advertising costs would have been incurred even if no new customer
contracts were acquired. Consequently, E expenses the advertising costs as
they are incurred.

commissions vs wages to sales staff
During the development of a new advisory service line of business, Bank B

incurred the following costs.
– External consultant and legal costs for developing a standard contract.
– Wages for sales staff who were assigned the task of signing new customers.
– Sales commissions paid to sales staff when a customer signs a contract.
B determines that the sales commissions paid to staff are costs of obtaining
a contract because they are payable only when the contract is secured. B
recognises an asset for the sales commissions, subject to recoverability.
In contrast, the wages for sales staff are not incremental costs because they
are incurred regardless of whether the contract is obtained. Consequently,
wages for sales staff are expensed as they are incurred.
The external consultant costs and legal costs also fail to meet the definition of
costs to obtain a contract because they are incurred regardless of whether a
contract is secured.
Example 4 – Commission paid on renewals after the initial contract

is obtained
Telco T pays its sales employees a commission of 30 for each new two-
year wireless contract entered into with a customer. T also pays 10 to sales
employees each time a customer renews a contract for an additional two years.
T needs to assess if and when these commissions should be capitalised as
costs to obtain a contract, subject to recoverability.
At contract inception, T concludes that the commission of 30 is an incremental
cost of obtaining the initial contract because the cost would not have been
incurred if the contract had not been obtained. The contract between T and the
customer creates no enforceable rights and obligations beyond the initial two-
year period. Because there is no contract beyond the two-year period, T does
not capitalise at contract inception future commissions that may be payable on
renewal (i.e. the renewal commission of 10).
On contract renewal, T incurs an additional commission of 10. This commission
of 10 is an incremental cost of obtaining the second contract because the cost
would not have been incurred if the contract had not been renewed.
T therefore capitalises both commissions when they are incurred. For
discussion of the amortisation period, see Section 7.3.
Example 5 – Dealer commission with claw-back provision
Telco E enters into a month-to-month wireless contract with Customer C that

includes voice and data services. The contract is obtained through Dealer
D, who is entitled to a commission of 20 from E. The commission is paid on
contract commencement but is clawed back and refunded to E if C cancels the
service within the first three months.
E concludes that D has completed its obligation, which is to sign C up for
the service, even though C must continue to receive the service until the
end of Month 3 for the commission to be fully earned. D’s commission is an
incremental cost to obtain the contract with C. Therefore, E recognises the
commission of 20 as an asset at contract inception, subject to recoverability. For
discussion of the amortisation period, see Section 7.3.
E assesses the contract cost asset for impairment together with its right to a
refund on the commission paid to D.
7.2 Costs of fulfilling a contract |
Example 6 – Commission plan with tiered thresholds: Cumulative

effect
Company B has a commission plan whereby once a cumulative threshold based

on a number of contracts is reached, a commission is paid as a percentage of
the cumulative value of that contract and the preceding contracts, taking into
account any commission already paid.
Number of contracts Commission
1–10 contracts 1% of value of contracts

11–20 contracts 4% of value of contracts 1–20
21+ contracts 7% of value of contracts 1–21+
As contracts 1–10 are obtained, B owes the salesperson only 1% of the contract
value, which would be the minimum incremental cost of obtaining each of
those contracts. In addition, B assesses whether it needs to accrue additional
commissions related to those contracts that may become payable if other
expected contracts are obtained. B also capitalises those additional amounts
as incremental costs of obtaining customer contracts, if the one-year practical
expedient does not apply or has not been elected.
Assume that B initially accrues 1% when it enters into Contracts 1–4. However,
by the time B enters into Contract 5 it expects that it will enter into at least
11 contracts. At that point, B adjusts its expectations and on entering into
Contract 5 capitalises a 4% commission related to Contract 5 and an additional
3% commission related to Contracts 1–4 because 1% was already capitalised.
7.2 Costs of fulfilling a contract

IFRS 15.95, BC308 If the costs incurred in fulfilling a contract with a customer are not in the scope of
other guidance – e.g. inventory, intangibles or property, plant and equipment – then an
entity recognises an asset only if the fulfilment costs meet the following criteria:
– they relate directly to an existing contract or specific anticipated contract;
– they generate or enhance resources of the entity that will be used to satisfy
performance obligations in the future; and
– they are expected to be recovered.
IFRS 15.96, BC307 If the costs incurred to fulfil a contract are in the scope of other guidance,
then the entity accounts for them using the other guidance. If other applicable
guidance precludes capitalisation, then the costs cannot be capitalised under the
revenue standard.
Are the costs incurred in fulfilling Yes

the contract in the scope of other Apply that other guidance
guidance?
No
Do they meet the criteria Yes

to be capitalised as Capitalise costs
fulfilment costs?
No
Expense costs as they are incurred
IFRS 15.97–98 When costs are not in the scope of other guidance, an entity considers whether
they are directly related to a contract or an anticipated contract. The following are
examples of costs that are capitalised when the specified criteria are met and of
costs that cannot be capitalised.
Direct costs that are Costs required to be

eligible for capitalisation if
other criteria are met
 expensed when they are
incurred

– Direct labour: e.g. employee – General and administrative costs:
wages unless they are explicitly chargeable
under the contract
– Direct materials: e.g. supplies
– Costs that relate to satisfied (or
– Allocation of costs that relate
partially satisfied) performance
directly to the contract: e.g.
obligations
depreciation and amortisation
– Costs of wasted materials, labour
– Costs that are explicitly
or other contract costs1
chargeable to the customer
under the contract – Costs that do not clearly relate to
unsatisfied or partially satisfied
– Other costs that were incurred
only because the entity
entered into the contract: e.g.
subcontractor costs
1. For the effects that these costs have on the measure of progress, see 5.3.3.
Example 7 – Set-up costs: Managed data centre
IFRS 15.IE192–IE196 Managed Services Company M enters into a contract to manage Customer
Y’s IT data centre for five years, for a fixed monthly fee. Before providing the
services, M designs and builds a technology platform to migrate and test Y’s
data. This platform is not transferred to Y and is not considered a separate
performance obligation. The initial costs incurred to set up the platform are
as follows.
Design services 40
Hardware and software 210
Migration and testing 100
Total 350
These set-up costs relate primarily to activities to fulfil the contract, but do not
transfer goods or services to the customer. M accounts for them as follows.
Type of cost Accounting treatment
Hardware Accounted for under guidance for property, plant,

and equipment
Software Accounted for under guidance for internal-use

software development/intangible assets
Design, migration and Capitalised under the standard because they:

testing of the data
– relate directly to the contract
centre
– generate or enhance resources of the entity that
will be used to satisfy performance obligations in
the future
– are expected to be recovered over the five-year
contract period
The capitalised hardware and software costs are subsequently measured using
other applicable guidance. The costs capitalised under the standard are subject
to its amortisation and impairment requirements (see Sections 7.3 and 7.4).
Applicability of the cost capitalisation guidance in the revenue

standard
For many contracts under which performance obligations are satisfied at a point
in time, an entity usually accounts for the costs of satisfying these performance
obligations under other standards – e.g. the inventory standard. This is because,
under such contracts, an entity is often creating an asset in the scope of other
guidance (e.g. inventory).
In contrast, when a performance obligation is satisfied over time, costs are
typically expensed as they are incurred because control of the work in progress
transfers continuously to the customer as it is produced and not at discrete
intervals – i.e. there is no asset created by the entity’s performance.
Judgement needed in determining whether cost capitalisation

criteria are met
IFRS 15.BC308, CF 4.20 Only costs that meet the definition of an asset – i.e. a present economic
resource controlled by the entity as a result of past events – are capitalised
under the standard. Judgement may be required to determine whether costs
enhance a resource that the entity controls. For example, it appears that
training costs generally do not meet all of the criteria for capitalisation because
employees are not a resource controlled by an entity.
Judgement needed in determining whether to capitalise learning

curve costs
IFRS 15.BC312–BC316 The standard may affect the accounting for contracts that have significant
learning curve costs that decrease over time as process and knowledge
efficiencies are gained. The Board noted that the standard addresses the
accounting for the effect of learning curve costs when two conditions exist:
– an entity has a single performance obligation to deliver a specified number of
units; and
– the performance obligation is satisfied over time.
The International Accounting Standards Board (the Board) noted that in these
cases an entity is likely to select a method for measuring progress (e.g. cost-
to-cost method) that would result in more revenue and expense recognised
earlier in the contract when the first units are produced, because this is when
more of the costs are incurred. The Board believed that this effect is appropriate
because of the greater value of the entity’s performance in the earlier part of the
contract, and if only one unit was sold then the entity would sell it for a higher
price. Further, when control passes to the customer as costs are incurred, it
would be inappropriate to capitalise those costs because they relate to past
performance. Therefore, if these conditions exist and the cost-to-cost method is
used, then generally learning curve costs will not be capitalised.
IAS 2 In other cases, if the contract is for multiple performance obligations (e.g.
selling multiple goods or products, such as multiple pieces of equipment or
machinery) that are each satisfied at a point in time (e.g. on transfer of control
of the good), then an entity will principally account for the costs of these
performance obligations under other standards, such as inventory guidance.
This is because an entity incurring costs to fulfil a contract without also
satisfying a performance obligation over time is probably creating an asset in
the scope of other guidance (e.g. inventory).
Costs in excess of constrained transaction price
IFRS 15.IE110–IE115 In certain circumstances, an up-front loss may arise because the revenue from a
transaction is constrained or the allocation of transaction price to a performance
obligation is limited to an amount that is lower than the cost of the goods
transferred to the customer. In these cases, it is not appropriate for an entity to
defer the up-front loss unless other specific guidance requires deferral.
For example, an entity sells goods with a cost basis of 100,000 for stated
consideration of 120,000. However, the total consideration is subject to a risk
of price concession in the future. The entity determines that the contract is
not onerous and a loss accrual is not required under other applicable guidance.
The entity constrains the transaction price and concludes that 90,000 is
highly probable of not resulting in a significant revenue reversal. When control
transfers, the entity recognises revenue of 90,000 and costs of 100,000. This
accounting entry results in an up-front loss until the uncertainty associated with
the variable consideration is resolved. For discussion of variable consideration
and the constraint, see Section 3.1.
Transportation services and costs
In some arrangements, an entity delivers goods to a location specified by its

customer and incurs transport costs. To determine how to account for these
costs, an entity considers whether the transportation service is a distinct
performance obligation (see Chapter 2) and when control of the goods transfers
to the customer.
If control of the goods transfers to the customer on delivery to the final
destination – i.e. transport and distribution costs form part of a single
performance obligation for the sale of goods – then the entity recognises
revenue when the goods are delivered and applies the guidance in the inventory
standard on accounting for transport costs (see Chapter 3.8 in our publication
Insights into IFRS).
If control of the goods transfers to the customer before the goods are
transported, then this may indicate that the transportation service is a separate
performance obligation and that the entity needs to determine whether it is a
principal or an agent in relation to it (see Section 10.3).
– If the entity acts as a principal for the transportation service, then it
recognises the gross revenue as the service is provided and applies the
guidance in the revenue standard on fulfilment costs.
– If the entity acts as an agent for the transportation service, then it recognises
the net revenue when the service is arranged.
Back-end-loaded costs
IFRS 15.39 In some arrangements, a significant portion of the costs may be incurred at the
end of the contract. If an entity uses an output method to measure progress,
then the margin in the period in which the back-end-loaded costs are incurred
may be lower than in other periods. Depending on the facts and circumstances,
the margin in a particular period may be negative.
Variability in margins is a potential outcome under the standard whenever
an entity uses an output measure of progress for an over-time contract. An
entity carefully considers whether it has determined the appropriate measure
of progress that depicts its performance in transferring control of goods or
services promised to the customer.
Example 8 – Training costs expensed as incurred
Company D enters into a contract with Customer E to provide maintenance

services for E’s manufacturing plant for five years. Before beginning the
maintenance services, D needs to train its employees on the specifics of
E’s plant in order to provide the service. The costs incurred by D related to
this training include the labour hours (salaries and wages) of the employees
participating in the training sessions.
D determines that these labour costs relate directly to the contract with E and
are expected to be recovered. However, D concludes that the costs do not
meet all of the criteria for capitalisation under the standard. This is because the
employees are not a resource that is controlled by D and therefore the definition
of an asset is not met. D therefore recognises the training costs as an expense
as they are incurred.
Example 9 – Set-up costs: Customised part for carmaker
Automotive Supplier S undertakes a large-scale project to produce a highly

customised part for Carmaker L. The contract with L guarantees a minimum
amount of parts to be ordered throughout the life of the project. Before
producing the parts, S:
– develops a new enterprise resource planning (ERP) system that enables it to
manage large-scale projects such as the one with L;
– trains its employees to use the new ERP system; and
– builds a technology platform that migrates and tests some of L’s databases
that contain information necessary for the production of the parts.
The ERP system is considered S’s intellectual property and can be used to
manage future projects. The technology platform is not transferred to L and is
not considered a separate performance obligation. Therefore, S concludes that
these set-up costs relate primarily to activities to fulfil the contract, but do not
transfer goods or services to L. S accounts for them as follows.
Type of cost Accounting treatment
ERP system Capitalised under the intangibles standard.
Training of employees S determines that it has insufficient control over the

economic benefits arising from its employees and
therefore it cannot capitalise these costs.
Migration and testing Capitalised as fulfilment costs because the costs:

technology platform
– relate directly to the contract with L
– generate or enhance resources of S that will be
used to satisfy performance obligations in the
future – i.e. the production of parts
– are expected to be recovered over the life of the
project
The capitalised software costs are subsequently accounted for under the
intangibles standard. Costs capitalised under the revenue standard are subject
to its amortisation and impairment requirements; see Sections 7.3 and 7.4.
Example 10 – Mobilisation costs
Company E enters into a contract with Customer F to construct an office

building. E determines that there is one performance obligation in the contract
(construction of the building), which is satisfied over time.
E incurs mobilisation costs to bring heavy equipment to the building site. E first
determines that these costs are not in the scope of another standard, noting
that the costs are not part of the cost of property, plant and equipment and no
inventory will be recognised related to the work in progress because control
transfers to the customer as the building is constructed. E also incurs costs in
relocating employees to the building site.
E determines that the mobilisation costs related to bringing the heavy
equipment to the building site meet the capitalisation criteria because they:
– are directly related to the contract with the customer;
– enhance a resource controlled by E (i.e. the heavy equipment), which will
be used to satisfy E’s performance obligation, which is construction of the
building; and
– are expected to be recovered.
E therefore capitalises the mobilisation costs related to the heavy equipment.
In contrast, the costs that E incurs to relocate employees are not capitalised.
These costs do not meet the definition of an asset because E cannot control the
resource enhanced by the cost, which is its employees.
Example 11 – Reconfiguration costs
Company F enters into a contract with Customer G to build a customised

item. To fulfil the contract, F incurs up-front costs to reconfigure its production
facility to create the specialised item. These costs consist primarily of direct
labour hours (salaries and wages) of employees. After the specialised asset is
completed, F expects to incur similar costs to restore its production facility to its
original state. The costs to initially reconfigure the facility and the costs to return
the facility to its original state are explicitly chargeable to G under the contract.
F determines that the up-front and back-end reconfiguration activities do not
transfer a good or service to the customer and there is only one performance
obligation in the contract – i.e. building the specialised asset. F determines that
it will recognise revenue over time using an output measure of progress.
7.3 Amortisation |
Up-front reconfiguration
F determines that the up-front reconfiguration costs meet the capitalisation
criteria because they are directly related to the contract, are expected to be
recovered and enhance the entity’s resources that will be used to satisfy the
performance obligation – i.e. its manufacturing facility that it will use to produce
the specialised asset for the customer. F therefore capitalises the up-front
reconfiguration costs and amortises the asset over time consistent with the
transfer of control of the specialised asset.
Back-end reconfiguration
F determines that the back-end reconfiguration costs cannot be capitalised
because they do not enhance a resource that will be used to satisfy the
performance obligation in the contract because the reconfiguration occurs after
the specialised asset has been produced. These costs are therefore expensed
as they are incurred.
In this case, F determines that the latter expenses are incurred when the back-
end reconfiguration occurs. Although it is probable that F will incur the costs,
the costs are avoidable up to the date they are incurred – i.e. F can choose
not to reconfigure its production facility. This analysis is similar to repair and
maintenance costs that are essential to the operation of the production facility
but are recognised only when the repair and maintenance activities take place.
7.3 Amortisation
IFRS 15.99 An entity amortises the asset recognised for the costs to obtain and/or fulfil a
contract on a systematic basis, consistent with the pattern of transfer of the good
or service to which the asset relates. This can include the goods or services in an
existing contract, as well as those to be transferred under a specific anticipated
contract – e.g. goods or services to be provided following the renewal of an
existing contract.
Example 12 – Amortisation: Specifically anticipated contracts
Company X enters into a contract with Customer Z to manage its payroll

processing for five years. X incurs initial set-up costs of 500. These set-up
activities do not transfer goods or services to Z. Based on historical experience
and customer analysis, X expects Z to renew the contract for an additional
five years, making a total of 10 years.
X recognises an asset of 500 for the set-up costs associated with the
payroll processing and amortises that asset over the 10-year period – i.e.
on a systematic basis consistent with the pattern of satisfaction of the
performance obligation, and including specifically anticipated renewal period
Example 13 – Amortisation: Acquisition costs for month-to-month

contracts
Telco E enters into a month-to-month wireless contract with Customer C that

includes voice and data services. Dealer D is paid a commission of 20 at the time
of sale. E does not pay commissions on renewals of month-to-month contracts.
Based on historical experience and customer analysis, E expects C to renew the
contract for 36 months (i.e. three years).
E recognises an asset of 20 for the commission paid and amortises that asset
over the three-year period – i.e. on a systematic basis consistent with the
pattern of satisfaction of the performance obligation, and including specifically
anticipated renewals.
Amortisation period may need to include anticipated contracts
Under the standard, a capitalised contract cost asset is amortised based on

the transfer of goods or services to which the asset relates. In making this
determination, the standard notes that those goods or services could be
provided under an anticipated contract that the entity can specifically identify.
The standard does not prescribe how an entity should determine whether
one or more anticipated contracts are specifically identifiable, so practice
is likely to develop over time. Relevant factors to consider may include the
entity’s history with that customer class and predictive evidence derived from
substantially similar contracts. In addition, an entity may consider the available
information about the market for its goods or services beyond the initial contract
term – e.g. whether it expects the service still to be in demand when renewal
would otherwise be anticipated. Judgement will be involved in determining
the amortisation period of contract cost assets, but an entity should apply
consistent estimates and judgements across similar contracts, based on
relevant experience and other objective evidence.
Anticipated contracts included when determining whether

practical expedient applies
Under the standard, an entity assesses the amortisation period to determine

whether it is eligible to apply the practical expedient not to recognise an asset
for the incremental costs to obtain a contract (costs to fulfil a contract are not
eligible for the practical expedient). For example, a cable television company
incurs incremental costs to obtain contracts with customers that have an initial
term of one year. However, a significant proportion of customers renew the
contracts at the end of the initial term. In this case, the company cannot assume
that it is eligible for the practical expedient, but instead has to determine the
amortisation period.
7.3 Amortisation |
Judgement is required when contracts include recurring

commissions
Some entities pay sales commissions on all contracts executed with

customers, including new contracts – i.e. new services and/or new customers
– and renewal or extension contracts. If the commission paid by an entity on a
new contract will be followed by corresponding commissions for each renewal
period – i.e. the salesperson will receive an incremental commission each time
the customer renews the contract or does not cancel it – then the entity applies
judgement to determine whether the original commission on the new contract
should be amortised only over the initial contract term or over a longer period.
The capitalised asset is generally recognised over the period covered by the
commission. If the renewal commission is commensurate with the initial
commission, then the initial commission is amortised over the original contract
term and the renewal commission is amortised over the renewal period.
Commissions are generally considered commensurate with each other when
they are reasonably proportional to the respective contract value.
When making the ‘commensurate’ evaluation, an entity considers whether the
economic benefits that it expects to obtain from payment of the commission
− i.e. the margin that it expects to earn from providing the good or service – is
commensurate with the commission paid. Therefore, when an entity’s expected
economic benefits from providing services during a renewal period are
commensurate with those from providing the same services during the initial
period, the renewal and initial commissions that will be paid should be roughly
equal to be considered commensurate with each other.
When the renewal commission is not commensurate, there are two acceptable
approaches to amortise the capitalised asset, as long as the approaches are
consistently applied to substantially similar circumstances.
– The entire capitalised asset is amortised over the period that includes the
specifically anticipated renewal periods.
– Only the portion of the capitalised asset that is incremental to the renewal
commission that the entity would normally pay is amortised over the period
that includes the specifically anticipated renewal periods.
Systematic amortisation for contract assets related to multiple

The standard requires the asset to be amortised on a systematic basis (which

might not be on a straight-line basis) that is consistent with the transfer to
the customer of the goods or services to which the asset relates. When the
contract contains multiple performance obligations satisfied at different points
in time, the entity takes this into account when determining the appropriate
amortisation period and pattern.
An entity may allocate a contract cost asset among the distinct goods or
services to which it relates or it may amortise the contract cost asset using a
single measure of progress considering all of the distinct goods or services to
which the asset relates.
If an entity chooses to allocate contract cost assets, then there may be multiple
acceptable approaches to doing so. For example, an entity may allocate the
contract cost asset on a relative stand-alone selling price basis. Alternatively,
depending on the facts and circumstances, other approaches may be
acceptable, including the following.
– Allocate the contract cost asset on the basis of the economic benefits (i.e.
the margin) that the entity expects to obtain from transferring the good or
service.
– When the entity determines that the contract cost asset relates specifically
to one or more distinct goods or services in a contract, but not all, it may be
reasonable to allocate the contract cost asset entirely to that (or those) goods
or services.
If an entity uses the single measure of progress approach to amortise contract
cost assets, then judgement may be required to determine a single measure
of progress that is consistent with the transfer to the customer of the goods or
services to which the contract relates.
No correlation with the accounting for non-refundable up-front

fees
The amortisation pattern for capitalised contract costs (i.e. including the term
of specific anticipated contracts) and the revenue recognition pattern for non-
refundable up-front fees (see Section 10.6) (i.e. the existing contract plus any
renewals for which the initial payment of the up-front fee provides a material
right to the customer) are not symmetrical under the standard. Therefore, there
is no requirement under the standard for the recognition pattern of these two
periods to align, even if contract costs and non-refundable up-front fees on the
same contract are both deferred.
Presentation of amortisation costs may often depend on the

nature of the entity and its industry
If an entity chooses to present its expenses by nature, then judgement will be

required to determine the nature of the expenses arising from the amortisation
of capitalised contract costs. The appropriate classification may often depend
on the nature of the entity and the industry in which it operates. In all cases, an
entity is subject to the general requirement to ensure that its presentation is not
misleading and is relevant to an understanding of its financial statements.
7.3 Amortisation |
Example 14 – Amortisation: Renewal commissions
Cloud Service Provider H agrees to provide hosting services for a one-year

term to Customer C for 100,000. C has the option to renew the services at
the end of each year for 100,000 per year. Based on its compensation plan, H
pays a salesperson 5,000 for securing the initial contract and will pay 1,000
to a salesperson who secures each renewal contract. H determines that the
payments to salespeople represent incremental costs of obtaining contracts.
Securing an initial contract generally requires a significant amount of effort from
the sales staff. Less effort is generally required to secure the renewal, which
may only involve making a few phone calls or sending an email to confirm that
the customer wants to renew.
Initial Expected Expected

contract renewal 1 renewal 2
Revenue 100,000 100,000 100,000

Costs of service (30,000) (30,000) (30,000)
Gross margin (exclusive of

commission costs) 70,000 70,000 70,000
Commission paid (5,000) (1,000) (1,000)
H concludes that the renewal commission is not commensurate with the initial
commission. This is because the commission paid initially is five times greater
than the renewal commission, but the economic benefits − i.e. the margin that
H expects to obtain from the renewal – equal those that it expects to obtain
from the initial contract.
Therefore, the initial commission is a partial prepayment for the economic
benefits that H expects to receive from subsequent renewal periods – i.e. the
amortisation period includes renewal periods. This cost is therefore not subject
to the practical expedient and is capitalised as an incremental cost of obtaining
the contract, subject to recoverability.
Example 15 – Amortisation: Commission paid on renewals after the

initial contract is obtained
Telco T pays its sales employees a commission of 30 for each new two-
year wireless contract entered into with a customer. T also pays 10 to sales
employees each time a customer renews a contract for an additional two years.
T previously concluded that both commissions qualify as a cost to obtain a
contract and are capitalised when they are incurred.
Based on historical experience and customer analysis, T expects the customer
to renew for an additional two years, making a total of four years. T further
observes that the 10 renewal commission is not commensurate with the 30
paid at inception of the contract.
T concludes that the first commission relates to a longer period than the initial
two-year contract term. In this example, T determines that the commission
should therefore be amortised over four years – i.e. on a systematic basis
consistent with the pattern of satisfaction of the performance obligation and
including the specifically anticipated renewal period. The renewal commission,
however, is amortised over two years, being the period to which the
commission relates. In this example, the amortisation expense would therefore
be higher during the renewal period than during the initial contract period.
7.4 Impairment
IFRS 15.101 An entity recognises an impairment loss to the extent that the carrying amount of
the asset exceeds the recoverable amount. The ‘recoverable amount’ is defined as
the:
– remaining expected amount of consideration to be received in exchange for the
goods or services to which the asset relates; less
– costs that relate directly to providing those goods or services and that have not
been recognised as expenses.
IFRS 15.102 When assessing an asset for impairment, the amount of consideration included in
the impairment test is based on an estimate of the amounts that the entity expects
to receive. To estimate this amount, the entity uses the principles for determining
the transaction price, with two key differences:
– it does not constrain its estimate of variable consideration: i.e. it includes its
estimate of variable consideration, regardless of whether the inclusion of this
amount could result in a significant revenue reversal if it is adjusted; and
– it adjusts the amount to reflect the effects of the customer’s credit risk.
Impairment model specifically for capitalised contract costs
IAS 2, 36 The standard includes an impairment model that applies specifically to assets
that are recognised for the costs to obtain and/or fulfil a contract. An entity
applies this model in addition to the impairment models in other standards –
e.g. the inventory standard and the impairment standard.
IAS 36.22, IFRS 15.103 The entity applies, in the following order:
– any existing asset-specific impairment guidance (e.g. for inventory);
– the impairment guidance on contract costs under the standard; and
– the impairment model for cash-generating units.
7.4 Impairment |
For example, if an entity recognises an impairment loss under the standard,

then it is still required to include the impaired amount of the asset in the
carrying amount of the relevant cash-generating unit if it also performs an
impairment test under the impairment standard.
Specific anticipated contracts are considered in impairment test
The standard specifies that an asset is impaired if its carrying amount exceeds
the remaining amount of consideration that an entity expects to receive, less
the costs that relate directly to providing those goods or services that have not
been recognised as expenses.
Under the standard, an entity considers specific anticipated contracts when
capitalising contract costs. Consequently, the entity includes cash flows from
both existing contracts and specific anticipated contracts when determining the
consideration expected to be received in the contract costs impairment analysis.
However, the entity excludes from the amount of consideration the portion that it
does not expect to collect, based on an assessment of the customer’s credit risk.
Discounting may be relevant for long-term contracts
IAS 36 For certain long-term contracts that have a significant financing component,
the estimated transaction price may be discounted. In this case, the standard
does not prescribe whether to discount the estimated remaining contract costs
when performing the impairment test, even though the contract cost asset
is not presented on a discounted basis in the entity’s statement of financial
position. Under IFRS, an entity discounts the contract costs for impairment
test purposes consistently with the standard on impairment of assets, which
requires it to take into account the time value of money when determining value
in use.
8 Contract modifications
Overview
A ‘contract modification’ occurs when the parties to a contract approve a

change in its scope, price or both. The accounting for a contract modification
depends on whether distinct goods or services are added to the arrangement
and on the related pricing in the modified arrangement. This section discusses
both identifying and accounting for a contract modification.
8.1 Identifying a contract modification

IFRS 15.18 A contract modification is a change in the scope or price of a contract, or both.
This may be described as a change order, a variation or an amendment. When a
contract modification is approved, it creates or changes the enforceable rights and
obligations of the parties to the contract. Consistent with the determination of
whether a contract exists in Step 1 of the model, this approval may be written, oral
or implied by customary business practices and should be legally enforceable.
If the parties have not approved a contract modification, then an entity continues
to apply the requirements of the standard to the existing contract until approval
is obtained.
IFRS 15.19 If the parties have approved a change in scope, but have not yet determined
the corresponding change in price – i.e. an unpriced change order – then the
entity estimates the change to the transaction price by applying the guidance
on estimating variable consideration and constraining the transaction price (see
Section 3.1).
Example 1 – Assessing whether a contract modification is

approved
Shipbuilder S is an experienced shipbuilder. One of its largest customers is

CruiseLines C, for whom S has previously built 11 cruise ships. S agrees to build
a 12th cruise ship for C and begins work on 1 January Year 1.
On 1 January Year 3, C informs S that it wishes to amend the specifications of
the new cruise ship to accommodate 50 additional staterooms. S determines
that in order to meet the request it would need to redesign three of the decks
and procure additional materials. S and C discuss these changes and start
preparing an amendment to the contract.
8 Contract modifications | 195
8.1 Identifying a contract modification |
To determine whether to account for the contract modification, S assesses

whether it has created new, or changed existing, enforceable rights and
obligations under the contract.
In making this determination, S notes the following.
– Although S and C have not executed a contract amendment or formal change
order for the additional materials, design services or the construction labour
necessary to complete the requested redesign and construction, changes of
this nature are common.
– When changes resulting from redesign have occurred in previous projects, C
has compensated S for the incremental costs along with a margin, as long as
S has been able to demonstrate that the additional costs were reasonable.
– Despite the fact that there has been no formal written agreement on
the change in scope or price, after consultation with its legal counsel S
determines that there is legal precedent for enforceability of similar types of
arrangements in the jurisdiction.
– S has significant, relevant history with C through 11 previous shipbuilding
contracts, which supports a conclusion that C will agree to pay S for
additional costs along with a reasonable margin.
– S fully expects that C will agree to, and be able to pay, the incremental fees in
this specific case.
– Considering all relevant facts and circumstances, S has the necessary
documentation to support its conclusion that enforceable rights and
obligations have been established.
S therefore concludes that the contract modification has been approved.
Conversely, if the facts and circumstances had been different, then the
following factors may have indicated that the contract modification had not
been approved.
– There was no legal precedent in the jurisdiction related to oral agreements of
this nature or S’s counsel could not determine whether the unpriced change
order would be enforceable.
– This was S’s first project with C, so S did not have relevant history or an
established business practice with C to support a conclusion that there was
an agreement between the parties that C would pay S for additional costs
along with a reasonable margin to create enforceable rights and obligations in
the contract.
– Previous experience with C had shown it to be reluctant or even unwilling to
pay for incremental costs and related margin on any scope changes before
their formal approval, which has usually been given only after extensive
negotiations.
– At the time of the contract modification, it was not probable that C would be
able to pay any incremental fees resulting from the scope changes.
Example 2 – Contract claim for delays caused by the customer
Construction Company B enters into a contract with Customer C to build an

office block on C’s land for 500,000. The contract specifies the construction
start date – 1 March – but B is not able to start its work until 15 March because
the site is not ready. The contract does not include specific terms that apply if
C fails to provide access to the land on time. Based on the advice of its legal
counsel, B raises a claim under the general disputes clause in the contract for
costs incurred as a result of the delay in the amount of 10,000. C disagrees with
the claim and the parties enter into negotiations.
B determines that the claim does not represent variable consideration because
it is not a contractual penalty. Instead, B accounts for the claim as a contract
modification.
Assessment focuses on enforceability
The assessment of whether a contract modification exists focuses on whether

the new or amended rights and obligations that arise under the modification
are enforceable. This determination requires an entity to consider all related
facts and circumstances, including the terms of the contract and relevant laws
and regulations. This may require significant judgement in some jurisdictions
or for some modifications, particularly if the parties to the contract have a
dispute about the scope or the price. In cases of significant uncertainty about
enforceability, written approval and legal representation may be required
to support a conclusion that the parties to the contract have approved
the modification.
Criteria to determine when a modification is approved
IFRS 15.13 The standard’s guidance on contract modifications does not explicitly address
whether the entity should assess the collectability of consideration when
determining that a modification has been approved. However, the objective of
the guidance and its focus on whether the modification creates enforceable
rights and obligations are consistent with the guidance on identifying a contract
in Step 1 of the model (see Chapter 1).
Also, in many cases a modification of the contract will be a ‘significant change

in facts and circumstances’ and therefore will require the entity to reassess
whether the Step 1 criteria for a contract are met. Under that guidance, the
following criteria are used to determine whether a contract exists and to help
assess whether a modification exists.
8.1 Identifying a contract modification |
... collection
... collection of of ... rights to goods
consideration
consideration is is or services and
probable
probable* payment terms can
be identified
A contract
exists if...
... it is approved
and the parties are
... it has commercial committed to
substance their obligations
IFRS 15.IE14–IE17 Relevant considerations when assessing whether the parties are committed
to performing their respective obligations, and whether they intend to enforce
their respective contract rights, may include whether:
– the contractual terms and conditions are commensurate with the
uncertainty, if there is any, about the customer or the entity performing in
accordance with the modification;
– there is a history of the customer (or class of customer) not fulfilling its
obligations in similar modifications under similar circumstances; and
– the entity has previously chosen not to enforce its rights in similar
modifications with the customer (or class of customer) under similar
circumstances.
Contract claims are evaluated using the guidance on contract

modifications
A contract claim is typically described as an amount in excess of the agreed

contract price that a contractor seeks to collect from customers or other parties.
Claims may arise from customer-caused delays, errors in specifications or
design, contract terminations, change orders that are in dispute or unapproved
on both scope and price, or other causes of unanticipated additional costs.
Contract claims are evaluated using the guidance on contract modifications.
IFRS 15.18–19, BC39, BC81 Assessing whether a contract modification related to a claim exists may require
a detailed understanding of the legal position, including third party legal advice,
even when a framework agreement or other governing document prescribes
the claim resolution process under the contract.
The assessment may be more straightforward if an objective framework for

resolution exists – e.g. if the contract includes a defined list of cost overruns
that will be eligible for reimbursement and a price list or rate schedule.
Conversely, the mere presence of a resolution framework – e.g. a requirement
to enter into binding arbitration instead of litigation – will generally not negate
an entity’s need to obtain legal advice to determine whether its claim is
enforceable. If enforceable rights do not exist for a contract claim, then a
contract modification has not occurred and no additional contract revenue is
recognised until either approval or legal enforceability is established.
An entity’s accounting for any costs incurred before approval of a contract

modification will depend on the nature of the costs. In some circumstances,
those costs will be expensed as they are incurred. In other circumstances,
an entity will need to consider whether the expectation of costs without a
corresponding increase in the transaction price requires the recognition of an
onerous contract provision. Or, a contract modification may be considered a
specifically anticipated contract such that the costs incurred before approval
of the contract modification – i.e. pre-contract costs – may be considered for
capitalisation based on the standard’s fulfilment cost guidance (see Section 7.2).
Partial contract terminations are accounted for as contract

modifications
Termination clauses are evaluated in Step 1 of the model to determine the

contract term for which enforceable rights and obligations exist. A substantive
termination penalty is evidence that rights and obligations exist throughout
the term to which the penalty applies. Once the contract term is established,
the entity accounts for the contract on that basis – i.e. if the contract term
is established on the basis that the customer will not terminate it, then the
termination penalty is not included. On termination, any penalties, whether they
are included in the original contract or negotiated when the parties agree to the
partial termination, are accounted for as a contract modification.
For example, Company B enters into a contract with Customer C to provide a
monthly service for a three-year period. C has the right to cancel the service in
Year 3 by paying a substantive termination penalty. Therefore, B determines that
it has a three-year contract to provide a series of distinct services (i.e. a single
performance obligation satisfied over time).
At the end of Year1, C decides to cancel Year 3 of the contract and pay the
termination penalty. B accounts for this partial termination as a contract
modification because the existing enforceable rights and obligations under the
contract have been changed – i.e. there is now only a two-year contract (one
remaining year). C’s termination payment is accounted for as consideration
under the modified contract and recognised prospectively (see Section 8.2).
8.2 Accounting for a contract modification

An entity accounts for a contract modification either as a separate contract (i.e. on
a prospective basis) or as part of the original contract (i.e. on a cumulative catch-up
basis). The following flowchart illustrates the key decision points to consider when
determining whether a contract modification should be accounted for as part of the
original contract or a separate contract.
8.2 Accounting for a contract modification |
Is contract modification No Do not account for contract

approved? modification until approved
Yes
Does it add distinct goods Are remaining goods or

or services that are priced No
services distinct from
commensurate with stand- those already transferred?
alone selling prices?
Yes No
Yes
Account for as
Account for as termination of existing Account for as part
separate contract contract and creation of original contract
(prospective) of new contract (cumulative catch-up)
(prospective)
IFRS 15.20 A contract modification is treated as a separate contract (prospective treatment) if it

results in:
– a promise to deliver additional goods or services that are distinct (see
Section 2.1); and
– an increase in the price of the contract by an amount of consideration that
reflects the entity’s stand-alone selling price for those goods or services adjusted
to reflect the circumstances of the contract.
IFRS 15.21 If these criteria are not met, then the entity’s accounting for the modification is
based on whether the remaining goods or services under the modified contract
are distinct from those goods or services transferred to the customer before the
modification.
If they are distinct, then the entity accounts for the modification as if it were a
termination of the existing contract and the creation of a new contract. In this case,
the entity does not reallocate the change in the transaction price to performance
obligations that are completely or partially satisfied on or before the date of the
contract modification. Instead, it accounts for the modification prospectively and the
amount of consideration allocated to the remaining performance obligations (or to
the remaining distinct goods or services in a series treated as a single performance
obligation) is equal to the:
– consideration included in the estimate of the transaction price of the original
contract that has not been recognised as revenue; plus or minus the
– increase or decrease in the consideration promised by the contract modification.
If the modification to the contract does not add distinct goods or services, then
the entity accounts for it on a combined basis with the original contract, as if the
additional goods or services were part of the initial contract – i.e. as a cumulative
catch-up adjustment. The modification is recognised as either an increase or
reduction in revenue at the date of the modification.
IFRS 15.90 If the transaction price changes after a contract modification, then an entity applies
the guidance on changes in the transaction price (see Section 4.3).
The following table provides examples of contract modifications, as well as how to
account for these modifications.
Account for the contract modification as…
A separate contract A termination of an Part of the original

existing contract and contract
creation of a new
contract
Addition of a distinct Addition of a distinct Addition of a good or

good or service at an good or service at a service to a contract
undiscounted price price that is discounted that consists of a
(e.g. a customer adds from its stand-alone single, integrated
a text messaging selling price (e.g. a performance obligation
Example 1
package to an existing customer receives free where that additional

mobile phone service premium channel cable good or service is
package and pays the service); all remaining highly inter-related
standard price offered services provided with the single
to customers for that under the original performance obligation
additional package) contract are distinct (e.g. changing the
floor plan of a partially
constructed house)
Modification of the Modification of the

contract price, with contract price, with
no change in the no change in the
contracted goods contracted goods
or services and the or services and the
Example 2
remaining goods remaining goods and

and services are services are not distinct
distinct from those from those already
already delivered delivered (e.g. a change
(e.g. a change in the in the contract price of
unit price for the a highly customised
remaining quantity of piece of software)
homogeneous items)
Example 3 – Contract modification: Additional goods or services
Construction Company G enters into a contract with Customer M to build a road

for a contract price of 1,000. During construction of the road, M requests that a
section of the road be widened to include two additional lanes. G and M agree
that the price will increase by 200.
In evaluating how to account for the contract modification, G first needs to
determine whether the modification adds distinct goods or services.
– If the road widening is not distinct from the construction of the road, then
it becomes part of a single performance obligation that is partially satisfied
at the date of the contract modification, and the measure of progress is
updated using a cumulative catch-up method.
– If the road widening is distinct, then G needs to determine whether the
additional 200 is commensurate with the stand-alone selling price of the
distinct good.
- If the 200 reflects its stand-alone selling price, then construction of the
additional two lanes is accounted for separately from the original contract
for construction of the road. This will result in prospective accounting for
the modification as if it were a separate contract for the additional two
lanes.
- If the 200 does not reflect its stand-alone selling price, then the
agreement to construct the additional two lanes is combined with the
original agreement to build the road and the unrecognised consideration
is allocated to the remaining performance obligations. Revenue is
recognised when or as the remaining performance obligations are
satisfied – i.e. prospectively.
Example 4 – Contract modification: An unpriced change order
Company M enters into a contract with Customer B to build a specialised asset

(Product S) for 1 million. M determines that building S is a single performance
obligation and that revenue for the contract should be recognised over time
using the cost-to-cost method. M estimates that the total cost of S will be
800,000 and incurs 600,000 in the first two years of the contract.
At the end of Year 2, B asks M to make a complex change to S. M agrees
and begins the work immediately. However, the corresponding change in
transaction price will be determined subsequently. M estimates that the costs
of S will increase by 200,000 and the consideration will increase by 300,000.
M assesses that the modification has created enforceable rights and obligations
and that B will pay for the incremental efforts. M therefore concludes that the
contract has been modified.
Because the contract includes only one performance obligation, which is

being satisfied over time, M accounts for the modification as part of the
original contract. However, before including the estimated consideration in the
transaction price, M considers whether the amount should be constrained.
M assesses all relevant factors and determines that it has sufficient experience
in fulfilling similar change orders on similar contracts and past experience with
B such that it is highly probable that a reversal of revenue will not occur on
resolution of the uncertainty (i.e. agreement with B on a price for the change
order). Therefore, M updates its measure of progress and adjusts revenue for
the modification as follows.
Before After
At end of Year 2 modification modification
Cumulative revenue 750,0001 780,0002

Adjustment to revenue 30,0003
Notes
1. Calculated as 1,000,000 × 600,000 / 800,000.
2. Calculated as (1,000,000 + 300,000) × 600,000 / (800,000 + 200,000).
3. Calculated as 780,000 - 750,000.
M therefore increases the cumulative amount of revenue recognised at the end

of Year 2 by 30,000 to 780,000.
Example 5 – Contract modification: Partially satisfied performance

obligation and additional distinct goods or services
Company Z enters into a contract with Customer C for a specialised asset

(Product S) for consideration of 1 million. Z has determined that the revenue
should be recognised over time using the cost-to-cost method.
At the end of Year 1, Z has satisfied 30% of its performance obligation.
Therefore, Z has recognised 300,000 of revenue up to the end of Year 1.
At the beginning of Year 2, the parties agree to change the specification of S and
increase the consideration by 100,000. Additionally, Z agrees with C to deliver
Product X for 120,000 along with S.
S and X are distinct goods and therefore represent separate performance
obligations. The price of X is significantly discounted from its stand-alone selling
price of 150,000.
Because the price of X is not commensurate with its stand-alone selling price,
X cannot be accounted for as a separate contract. Therefore, both S and X are
considered part of the same contract when accounting for the modification.
Z accounts for the modification as follows.
Step (i) – Calculate the remaining consideration
Remaining consideration on original contract not yet recognised

as revenue 700,000
Change order 100,000
Product X 120,000
Total remaining consideration 920,000
Step (ii) – Allocate the remaining consideration between Products S and X
Z allocates the remaining consideration of 920,000 to S and X under the general

guidance in Step 4 of the model as follows.
Stand-alone Percent Allocated

selling prices allocated amounts
Remaining for Product S 900,000 85.7% 788,571

Product X 150,000 14.3% 131,429
Total 1,050,000 100.0% 920,000
Step (iii) – Record a cumulative catch-up adjustment for the partially

satisfied performance obligation
For the partially satisfied performance obligation (S), Z accounts for the contract
modification as part of the original contract. Therefore, Z updates its measure of
progress and estimates that it has satisfied 27.4% of its performance obligation
after revising its cost-to-cost measure of progress for the revised expected
costs. As a consequence, Z calculates the following adjustment to reduce
revenue previously recognised:
1,732 = 27.4% complete × 1,088,5711 modified transaction price allocable to S -
300,000 revenue recognised to date.
When Z transfers control of X, it recognises revenue in the amount of 131,429.
Note
1. Calculated as 300,000 + 788,571.
Different approaches for common types of contract modifications
To determine the appropriate accounting, an entity needs to evaluate whether

the modification adds distinct goods or services and, if so, whether the prices
of those distinct goods or services are commensurate with their stand-
alone selling prices. This determination will depend on the specific facts
and circumstances of the contract and the modification, and may require
significant judgement.
Entities entering into construction-type contracts or project-based service
contracts (e.g. a service contract with a defined deliverable such as a valuation
report) may often account for contract modifications on a combined basis with
the original contract. However, modifications to other types of contracts for
goods (e.g. a sale of a number of distinct products) or services (e.g. residential
television or internet services, or hardware/software maintenance services)
may often result in prospective accounting. For discussion on modifications of
licences of intellectual property, including renewals and extensions of licences,
see Section 9.4.
Distinct goods or services in a series that are treated as a single

performance obligation are considered separately
IFRS 15.BC115 Sometimes an entity needs to apply the contract modification guidance
to a series of distinct goods or services that is accounted for as a single
performance obligation. In this case, the entity considers the distinct goods or
services in the contract, rather than the single performance obligation.
Interaction of new contracts with pre-existing contracts needs to

be considered
Any agreement with a customer involving a pre-existing contract with an

unfulfilled performance obligation may need to be evaluated to determine
whether it is a modification of the pre-existing contract.
Accounting for contract asset on termination of an existing

contract and creation of a new one
IFRS 15.107 In some cases, an entity may have a contract asset at the time when a contract
is modified. If a modification of the contract results in a termination of the
existing contract and creation of a new one, then the entity does not write off
the existing contract asset but carries it forward to the new contract, subject to
impairment. This is because a write-off of the contract asset would result in a
reversal of previously recognised revenue and would be inconsistent with the
prospective accounting for the modification.
Additional application example
Example 6 – Contract modification: Additional goods or services:

Car supply agreement
On 1 January, Carmaker G enters into a framework agreement with Automotive

Supplier S to perform engineering and design (E&D) activities and produce
parts. The agreement between G and S does not specify a separate price for
E&D services, but the price of each part includes a mark-up to compensate S
for those services. The agreement does not state a minimum quantity of parts
to be ordered by G, but it contains a termination clause under which S will be
reimbursed for any costs incurred for the E&D services if G terminates the
agreement. Therefore, on 1 January S concludes that a contract exists for the
E&D activities but not for the production of parts.
On 1 April, S completes the E&D activities and recognises revenue for the
services provided.
On 1 December, G orders the first batch of parts.
S assesses whether the purchase order for the parts should be treated as a
modification of the contract to provide E&D services.
S notes that the consideration for the parts does not reflect their stand-alone
selling price, because the price of the parts is meant to compensate S for
the lower margin on the E&D services. Therefore, S concludes that it may be
appropriate to consider the modification guidance.
S concludes that the parts ordered are distinct from the E&D activities,
because, among other considerations, they are produced after the E&D
activities are completed and their production cannot affect the way the E&D
activities are performed.
Under the modification guidance, S would account for G’s purchase order
together with any remaining performance obligations. However, S notes
that no remaining obligations are left under the E&D contract – i.e. it is
completely satisfied. Therefore, it does not allocate any consideration payable
for the parts to the E&D services, and accounts for the purchase order as a
separate contract.
9 Licensing
Overview
The standard provides application guidance for the recognition of revenue

attributable to a distinct licence of intellectual property (IP).
If the licence is distinct from the other goods or services, then an entity
assesses its nature to determine whether to recognise revenue allocated to the
licence at a point in time or over time.
The standard also contains guidance, separate from the general model for
estimating variable consideration, on the recognition of sales- or usage-based
royalties on licences of IP when the licence is the sole or predominant item to
which the royalty relates.
The following flowchart summarises how the standard applies to licences of IP.
Is the contract a licence of IP?

(See Section 9.1)
Sale of IP/service Licence of IP

Apply the general
guidance to the
combined bundle
and consider the Is the licence distinct
Apply Step 5 No
nature of the from non-licence
guidance
licence when goods or services?
(see Chapter 5)
applying Step 5 (See Section 9.2)
(see Chapter 5
and Section 9.3) Yes
Does the customer

If the contract have a right to access
includes sales- or usage- the entity’s IP?
based royalties, is the (See Section 9.3)
licence the predominant
item to which the Yes No
royalty relates?
Over-time Point-in-time
performance performance
Sales- or usage- obligation obligation
based royalties
are estimated
and subject to
the general
model’s Sales- or usage-based royalties are
constraint under No Yes
recognised at the later of when sale
Step 3 or usage occurs, and satisfaction of the
(see Section 3.1) performance obligation (see Section 9.6)

9 Licensing | 207
9.1 Licences of intellectual property |
9.1 Licences of intellectual property

IFRS 15.B52 A licence of IP establishes a customer’s rights to the IP of another entity. Examples
of IP licences include:
– software and technology;
– franchises;
– patents, trademarks and copyrights;
– films, music and video games; and
– scientific compounds.
Example 1 – Promise is a service not a licence
Streaming Service S provides a music streaming service to customers. S enters

into a one-year contract that grants Customer C a licence to access the music
content via the internet on C’s personal devices. However, C does not have the
ability to download the music content during the contract term and it can listen
to the music only through the internet.
S evaluates whether it is providing C with a service or a licence to its content. S
concludes that the contract does not include a licence because C does not have
the ability to download the music during the contract term and use it without
accessing S’s site. As a result, the licence guidance does not apply.
Example 2 – Promise is a licence
Production Company P produces music content. P enters into a three-year

licence agreement to provide an initial music library and rights to future content
to Customer C. The terms of the licence allow C to play, stream and broadcast
the content to other parties.
P evaluates whether it is providing C with a service or a licence to its content. P
concludes that the contract includes a licence of IP because C takes delivery of
the music library that it can use without further services from P.
As a result, the licensing guidance applies and P needs to evaluate whether
the licence related to the initial music library is distinct from the rights to
future content.
Different accounting for a licence and sale of IP
A licence establishes a customer’s rights to a licensor’s IP and the licensor’s

obligations to provide those rights. Specific application guidance is provided for
measuring and recognising revenue from licensing transactions, including guidance
for recognising revenue from sales- or usage-based royalties (see Section 9.6).
The accounting depends on the legal distinction between a sale and a licence
of IP. If a transaction is a legal sale of IP, then it is subject to the general model
in the same way as the sale of any good or other non-financial asset. Sales- or
usage-based royalties on a sale of IP are subject to the guidance on measuring
variable consideration, including the constraint, and not the specific recognition
guidance applicable to sales- or usage-based royalties from a licence of IP.
No definition of intellectual property
The term ‘intellectual property’ is not defined in the standard, nor elsewhere in
IFRS. In some cases, it will be clear that an arrangement includes a licence of
IP – e.g. a trademark. In other cases – e.g. when content is being made available
to a customer over the internet – it may be less clear and the accounting may
be different depending on that determination. Therefore, an entity may need
to apply judgement to determine whether the guidance on licences applies to
an arrangement.
IP that forms part of tangible asset
IP may be included in tangible products such as DVDs, hard-copy books or

CDs. The first-sale doctrine, which exists in US copyright law, provides that
the individual who purchases a copyrighted work from the copyright holder
is the owner of that individual copy and receives the right to sell or lease that
particular copy.
Generally, when IP is embedded in the tangible product the licensing guidance
does not apply to the sale of goods subject to the first-sale doctrine. Instead, an
entity applies the general guidance in the revenue standard to determine the
transaction price and when control of the goods transfers to the customer. Non-
US entities would consider similar laws and concepts to the first-sale doctrine.
Distinguishing between a licence and service
Even if a contract states that the arrangement is a licence, the nature of the
promise to the customer may be that of providing a service. The evaluation of
whether the arrangement is a licence or a service requires judgement based on
the identification of the performance obligations in the arrangement – i.e. Step 2
of the model (see Chapter 2). The guidance on determining whether a licence is
distinct (see Section 9.2) also applies in the determination.
9 Licensing | 209
9.2 Determining whether a licence is distinct |
9.2 Determining whether a licence is distinct

IFRS 15.B53 A contract to transfer a licence to a customer may include promises to deliver
other goods or services in addition to the promised licence. These promises may
be specified in the contract or implied by an entity’s customary business practices.
Consistent with other types of contracts, an entity applies Step 2 of the model
(see Chapter 2) to identify each of the performance obligations in a contract
that includes a promise to grant a licence in addition to other promised goods or
services. This includes an assessment of whether the:
– customer can benefit from the licence on its own or together with other
resources that are readily available; and
– licence is separately identifiable from other goods or services in the contract.
IFRS 15.BC414X The basis for conclusions states that:
– in some cases it may be necessary to consider the nature of the entity’s
promise in granting a licence, even when the licence is not distinct; and
– an entity considers the nature of its promise in granting a licence that is the
primary or dominant component of a combined performance obligation.
IFRS 15.B54–B55 If the licence is not distinct, then the entity recognises revenue for the single
performance obligation when or as the combined goods or services are transferred
to the customer. It generally applies Step 5 of the revenue model (see Chapter 5)
to determine whether the performance obligation containing the licence is
satisfied over time or at a point in time.
IFRS 15.B54 The following are examples of licences that are not distinct.
Type of licence Example
Licence that forms part of a – Software embedded in the

tangible good and is integral to the operating system of a car
functionality of the good
Licence that the customer can – Media content that the customer can
benefit from only in conjunction with access only via an online service
a related service
– Drug compound that requires
proprietary research and
development (R&D) services from
the entity
Example 3 – IP licence in combined performance obligation
Company X enters into a five-year patent licence with Customer Z for a fixed
fee. X also provides essential consulting services for two years.
X determines that there are two promises in the contract – the patent licence
and the consulting service component. However, the licence is not distinct from
the service component in the contract because the services are essential and
highly inter-related.
Assume that the combined performance obligation is satisfied over time – e.g.
because the patent is being created for Z and will have no alternative use to X,
and X has an enforceable right to payment for performance completed to date.
X considers the nature of the licence to determine the period over which the
combined performance obligation will be satisfied and the appropriate measure
of progress to apply.
If the licence provides a right to use the IP, then the combined performance
obligation is satisfied over the two-year consulting service period. In contrast,
if the licence provides a right to access X’s IP, then the performance obligation
will not be completely satisfied until the end of the licence term (and revenue
will be recognised over the five-year licence period). In both cases, X has to
determine an appropriate measure of progress to apply over the two- or five-
year performance period (e.g. time elapsed, costs incurred). For discussion of
measuring progress, see Section 5.3.
Example 4 – Customer’s option to purchase additional licences
Software Vendor S enters into a five-year software arrangement with

Customer C. As part of the arrangement, S provides access to download copies
of the software from its website. C pays a fixed fee of 300,000 for up to 200
software downloads. Each downloaded copy can have only a single user. C pays
an additional 1,000 per copy downloaded in addition to the 200, pro-rated based
on the remaining licence period at the time of download (e.g. 1,000 for copies
downloaded in Year 1; 800 for copies downloaded in Year 2).
C receives access codes for 200 downloads on commencement of the contract.
C has to request access codes for each additional download, which S will
provide. S measures the number of downloads and C pays for any additional
downloads each quarter.
The initial arrangement is generally a multiple licence scenario (i.e. C has
been granted 200 software licences) that can be accounted for as a single
performance obligation because the licences are transferred to C at the same
point in time. Therefore, the option for additional downloads represents an
option to acquire additional user licences to the software for 1,000 per licence.
Because the 1,000 per copy option price is less than the initial per-user licence
fee of 1,500 per licence (300,000 / 200 users), S needs to evaluate whether the
option provides C with a material right (see Section 10.4).
9 Licensing | 211
Assessing whether a licence is distinct may require significant

judgement
Licences of IP are frequently included in arrangements that include promises for

other goods or services. The evaluation of whether a licence is distinct is often
complex and requires assessment of the specific facts and circumstances of
the contract. The standard provides the following illustrative examples that may
be helpful in evaluating different fact patterns.
Type of
contract Description Observations
IFRS 15.IE49–IE58D Example 11A and 11B – Technology
Contract Two cases are provided Installation services involving

to transfer to illustrate differences in the customisation or
a software identifying performance modification of a software
licence, obligations depending licence may result in a
installation on whether the software conclusion that the licence is
services, will be significantly not distinct from the services.
unspecified customised or modified
Determining whether
software as part of professional
professional services involve
updates and services also promised
significant customisation or
technical to the customer in the
modification of the software
support contract.
may require significant
judgement.
IFRS 15.IE278–IE280 Example 55 – Technology
Contract to The customer is entitled There may be diversity in views

license IP to all updates for new about the kinds of technology
related to the designs or production to which the fact pattern,
design and processes. analysis and outcome may
production apply in practice.
The updates are essential
processes
to the customer’s ability An entity considers the nature
for a good,
to derive benefit from the of the promise in these fact
including
licence. patterns. For example, this
updates to
promise is a service rather than
that IP The example concludes
a licence of IP with upgrades.
that the licence and the
updates are inputs into a
combined item for which
the customer contracted
and that the promises to
grant the licence and the
updates are not distinct.
The entity’s overall
promise to the customer
is to provide ongoing
access to the entity’s IP.
Type of
contract Description Observations
IFRS 15.IE281–IE288 Example 56A and 56B – Life sciences
Contract to Two cases are provided Manufacturing services that

licence patent to illustrate differences in can be provided by another
rights to an identifying performance entity are an indication that the
approved obligations depending customer can benefit from a
drug, which on whether the licence on its own.
is a mature manufacturing process
product, is unique or specialised,
and to whether the licence can
manufacture be purchased separately
the drug for or whether other entities
the customer can also manufacture the
drug.
These examples highlight the potential difficulty of determining whether

services and IP are, in effect, inputs into a combined item and, therefore, not
separately identifiable from each other. For example, an entity may license a
video game and provide additional online hosting services that are not sold on
a stand-alone basis. The entity will need to determine the degree to which the
service is integral to the customer’s ability to derive benefit from its rights to
the video game. The entire arrangement may be a single performance obligation
or, alternatively, if the customer can derive substantial functionality from using
the video game on a stand-alone basis without the additional online hosting
services, then they may be separate performance obligations.
Customer’s option to purchase additional licences
In some contracts, an entity charges fees for additional copies or usage of

software. The entity determines whether the contract is for a single licence
or multiple licences. Depending on the facts of the arrangement, the contract
might contain options to purchase additional software licences that will need
to be evaluated to determine whether they convey a material right to the
customer or a single licence with a usage-based fee. Judgement will be needed
to determine whether an entity should apply the guidance on customer options
or usage-based fees to these types of arrangements (see Example 4 in this
chapter).
Although this type of arrangement is common for software, the same
considerations apply to similar arrangements for licences of other types of IP.
9 Licensing | 213
Example 5 – Licence for drug compound and related service:

Separate performance obligations
Pharma Company P enters into an arrangement with Customer C. Under the

arrangement, C receives a licence for exclusive worldwide rights to Compound
B. B has shown promising results in early testing but still requires further R&D
before it can be commercialised. P will perform the R&D services required
to get B approved for commercial sale, which primarily relate to testing and
validating its efficacy. The R&D services required to develop B further could be
performed by another pharma company.
P considers whether the licence and the R&D services are distinct and
determines that:
– the R&D services required to take B through to commercialisation are not
unique or specialised − i.e. other entities could perform them;
– the required R&D services do not have a transformative effect on the licence;
and
– P’s services do not change the nature of B.
Therefore, P concludes that the licence and the R&D services are distinct and
the contract includes two performance obligations:
– a licence; and
– an R&D service.
However, if the nature of the R&D services provided were different such that
only P could perform those services – e.g. the R&D work is highly specialised
or would significantly modify B – then P may conclude that the licence for B and
the R&D services were not distinct in the context of the contract and should be
treated as a single performance obligation.
Example 6 – Licence for drug compound and related service: Single

IFRS 15.IE281–IE288 Pharma Company P licenses its patent rights to an approved drug compound to
Customer C for 10 years and promises to manufacture the drug for C. The drug
is a mature product; therefore, P will not undertake any activities to support the
drug, which is consistent with its customary business practices. In this case, no
other entity can manufacture the drug because of the highly specialised nature
of the manufacturing process. As a result, the licence cannot be purchased
separately from the manufacturing service – i.e. the licence is not capable of
being distinct.
P determines that C cannot benefit from the licence without the manufacturing
service. Therefore, the licence and the manufacturing service are not distinct
and P accounts for them as a single performance obligation.
Conversely, if the manufacturing process used to produce the drug were not
unique or specialised and other entities could also manufacture the drug for C,
then P might instead conclude that C could benefit from the licence on its own
and that the licence and manufacturing service were separate performance
obligations.
9.3 Determining the nature of a distinct licence

IFRS 15.B56 A licence for IP that is distinct from other goods or services in the contract is a
separate performance obligation. To determine whether the performance obligation
is satisfied at a point in time or over time, the entity considers whether the nature of
its promise is to provide the customer with a right to:
– access the entity’s IP throughout the licence period; or
– use the entity’s IP as it exists at the point in time at which the licence is granted.
The revenue from a right-to-access licence is recognised over time and the revenue
from a right-to-use licence is recognised at a point in time.
IFRS 15.B58 The nature of an entity’s promise in granting a licence is a promise to provide a right
to access the entity’s IP if all of the following criteria are met.
Are all of the following criteria met?
Criterion 1 Criterion 2 Criterion 3
Entity expects Rights directly Activities do not No Right to

to undertake expose the result in the use the
activities that customer to transfer of a entity’s
significantly positive or good or service IP
affect the IP negative effects to the customer
of the entity’s
activities
Yes
Right to access
the entity’s IP
IFRS 15.B59 To determine whether a customer could reasonably expect the entity to undertake
activities that do not result in the transfer of a good or service to the customer that
significantly affect the IP, the entity considers its customary business practices,
published policies and specific statements, and whether there is a shared economic
interest between the entity and the customer.
9 Licensing | 215
9.3 Determining the nature of a distinct licence |
IFRS 15.B59A Under Criterion 1, an entity ‘significantly affects’ the IP when either the:
– activities are expected to change the form (e.g. the design or content) or
functionality (e.g. the ability to perform a function or task) of the IP; or
– ability to obtain benefit from the IP is substantially derived from, or dependent
on, those activities (e.g. the ability to benefit from a brand is often dependent on
the entity’s ongoing activities to support or maintain the value of that brand).
An entity’s ongoing activities do not significantly affect the IP when the IP has
significant stand-alone functionality, unless they change that functionality. IP
that often has significant stand-alone functionality includes software, biological
compounds or drug formulas, and completed media content (e.g. films, television
shows and music recordings).
IFRS 15.B61 If the criteria are not met, then the nature of the licence is a right to use the entity’s
IP as that IP exists at the date the licence is granted. This is because in this case the
customer can direct the use of, and obtain substantially all of the remaining benefits
from, the licence at the point in time when it transfers. When the nature of the
licence is a right to use the entity’s IP, it is accounted for as a performance obligation
satisfied at a point in time.
IFRS 15.B62 Contractual provisions relating to time, geographic region or use could represent:
– additional licences if they create a right to use or access IP that the customer
does not already control; or
– only attributes of a promised licence to IP that the customer controls.
If these provisions do not represent multiple licences, then they are not considered
when determining the nature of the entity’s promise in granting a licence (i.e.
whether a right-to-use or right-to-access licence).
A guarantee provided by the licensor that it has a valid patent to the underlying
IP and that it will maintain and defend that patent is also not considered when
determining whether the licence provides a right to access or a right to use the
entity’s IP.
Example 7 – Assessing the nature of a software licence with

unspecified upgrades
Software Company X licenses its software application to Customer Y. Under the

agreement, X will provide updates or upgrades on a when-and-if-available basis;
Y can choose whether to install them. Y expects that X will undertake no other
activities that will change the functionality of the software.
Although the updates and upgrades will change the functionality of the
software, they are not activities considered in determining the nature of the
entity’s promise in granting the licence. The activities of X to provide updates or
upgrades are not considered because they transfer a promised good or service
to Y – i.e. updates or upgrades are distinct from the licence. Therefore, the
software licence provides a right to use the IP that is satisfied at a point in time.
Example 8 – Assessing the nature of a film licence and the effect of

marketing activities
Film Studio C grants a licence to Customer D to show a completed film. C plans

to undertake significant marketing activities that it expects will affect box office
receipts for the film. The marketing activities will not change the functionality of
the film, but they could affect its value.
C would probably conclude that the licence provides a right to use its IP and,
therefore, is transferred at a point in time. There is no expectation that C will
undertake activities to change the form or functionality of the film. Because
the IP has significant stand-alone functionality, C’s marketing activities do not
significantly affect D’s ability to obtain benefit from the film, nor do they affect
the IP available to D.
Franchise licences generally provide a right to access IP
IFRS 15.IE289–IE296 Franchise rights generally provide a right to access the underlying IP. This is
because the franchise right is typically affected to some degree by the licensor’s
activities of maintaining and building its brand. For example, the licensor
generally undertakes activities to analyse changing customer preferences and
enact product improvements and the customer has the right to exploit and
benefit from those product improvements.
Example 57 in the standard illustrates a 10-year franchise arrangement in which
the entity concludes that the licence provides access to its IP throughout the
licence period.
Only consider licensor’s activities that do not transfer a good or

service to the customer
IFRS 15.B58, BC410 When evaluating the nature of its promise to provide a licence of IP, a licensor
considers only activities that do not transfer a good or service to the customer.
The third criterion for a licence to be a right to access the entity’s IP is that the
licensor’s activities do not transfer a good or service to the customer. If all of
the activities that may significantly affect the IP transfer goods or services to
the customer, then this criterion will not generally be met, resulting in point-in-
time recognition.
For example, a contract that includes a software licence and a promise to
provide updates to the customer’s software does not result in a conclusion
that the licensor is undertaking activities that significantly affect the IP to which
the customer has rights. This is because the provision of updates constitutes
the transfer of an additional good or service to the customer – i.e. updates are
distinct from the licence.
9 Licensing | 217
Effect of different attributes of a licence on determining the nature

of the entity’s promise
IFRS 15.B62, BC414O–BC414R, IE303–IE306 A licence is, by its nature, a bundle of rights conveyed to a customer. The various
attributes of a licence (e.g. restrictions on time, geography or use) do not affect
whether the licence provides a right to use or a right to access the entity’s IP.
IFRS 15.IE303–IE306 For example, Example 59 in the standard discusses a licence to a symphony
recording that includes restrictions on time, geography and use (i.e. the licence
is limited to two years in duration, permits use only in Country A and limits
the customer to use of the recorded symphony only in commercials). These
restrictions are attributes of the single licence in the contract and do not affect
the conclusion that the licence provides a right to use the entity’s IP. However,
in certain fact patterns contractual provisions characterised as restrictions on
time, geography or use may result in a conclusion that the entity has promised
to grant multiple licences to the customer (see Section 9.5).
Entity’s activities that significantly affect the IP
IFRS 15.B58, B59A An entity’s activities that do not transfer a good or service to the customer can
significantly affect the IP to which the customer has rights when the customer’s
ability to obtain benefits from the IP is substantially derived from, or dependent
on, those activities. This is one of the three criteria that have to be met under
IFRS to recognise revenue for a licence of IP over time.
When classifying a licence as a right to use or a right to access IP, an entity
focuses on whether its ongoing activities are expected to change the licence’s
form or functionality, or whether the customer’s ability to obtain benefit from
the licence substantially depends on other activities of the entity that are not
expected to change the form or functionality of the IP (e.g. advertising or other
activities to support or maintain the value of the IP).
Recognition timing Rationale Examples
Point in time Revenue is recognised – Software

at a point in time
– Biological
because there is no
compounds
explicit or implicit
obligation for the entity – Drug formulas
to undertake activities
– Copies of media
during the licence
content: e.g. films,
period to (a) change the
television shows,
form or functionality
music
of the IP or (b) support
or maintain the value
of the IP during the
licence period.
Recognition timing Rationale Examples
Over time Revenue is recognised – Brand names

over time because
– Franchise rights
the IP’s design or
functionality changes – Logos and team
over time or because names
the customer’s ability
to obtain benefits from
the IP is substantially
derived from, or
dependent on, the
company’s ongoing
activities that will be
performed over the
licence period.
Cost and effort to undertake activities are not the focus of the
analysis
A licence is not satisfied over time solely because the entity is expected to
IFRS 15.IE297–IE302, BC409
undertake activities that significantly affect the licensed IP (the first criterion).
Those activities also have to directly expose the customer to their effects (the
second criterion). When the activities do not affect the customer, the entity is
merely changing its own asset – and although this may affect the entity’s ability
to grant future licences, it does not affect the determination of what the current
licence provides to the customer or what the customer controls.
Example 58 in the standard illustrates that, when determining the nature of its
promise, an entity focuses on whether its activities directly affect the IP already
licensed to the customer – e.g. updated character images in a licensed comic
strip – rather than the significance of the cost and effort of the entity’s ongoing
activities. An entity also focuses on whether the customer’s ability to obtain
benefit from the IP is substantially derived from, or dependent on, the entity’s
activities (i.e. the publishing of the comic strip).
Similarly, a media company licensing completed seasons of television
programmes and simultaneously working on subsequent seasons would
generally conclude that the subsequent seasons do not significantly affect
the IP associated with the licensed seasons, and would not focus merely on
the significance of the cost or efforts involved in developing the subsequent
seasons.
9 Licensing | 219
Example 9A – Assessing the nature of a team name and logo

licence: Active sports team
Sports Team D enters into a three-year agreement to license its team name and
logo to Apparel Maker M. The licence permits M to use the team name and logo
on its products, including display products, and in its advertising or marketing
materials.
The nature of D’s promise in this contract is to provide M with the right to
access the sports team’s IP and, accordingly, revenue from the licence will
be recognised over time. In reaching this conclusion, D considers all of the
following facts.
– M reasonably expects D to continue to undertake activities that support and
maintain the value of the team name and logo by continuing to play games
and field a competitive team throughout the licence period. These activities
significantly affect the IP’s ability to provide benefit to M because the value
of the team name and logo is substantially derived from, or dependent on,
those ongoing activities.
– The activities directly expose M to positive or negative effects (i.e. whether
D plays games and fields a competitive team will have a direct effect on how
successful M is in selling clothing featuring the team’s name and logo).
– D’s ongoing activities do not result in the transfer of a good or a service to
M as they occur (i.e. the team playing games does not transfer a good or
service to M).
Example 9B – Assessing the nature of a team name and logo

licence: Sports team that is no longer active
Modifying Example 9A, Sports Team D has not played games in many years and
the licensor is Brand Collector B, an entity that acquires IP such as old team
or brand names and logos from defunct entities or those in financial distress.
B’s business model is to license the IP, or obtain settlements from entities that
use the IP without permission, without undertaking any ongoing activities to
promote or support the IP.
Based on B’s customary business practices, Apparel Maker M probably does
not reasonably expect B to undertake any activities to change the form of the IP
or to support or maintain the IP. Therefore, B would probably conclude that the
nature of its promise is to provide M with a right to use its IP as it exists at the
point in time at which the licence is granted.
Example 10 – Licence for right to access IP
Franchisor Y licenses the right to operate a store in a specified location to

Franchisee F. The store bears Y’s trade name and F will have a right to sell Y’s
products for 10 years. F pays an up-front fixed fee.
The franchise contract also requires Y to maintain the brand through product
improvements, marketing campaigns etc.
The licence provides F access to the IP as it exists at any point in time in the
licence period. This is because:
– Y is required to maintain the brand, which will significantly affect the IP by
affecting F’s ability to obtain benefit from the brand;
– any action by Y may have a direct positive or negative effect on F; and
– these activities do not transfer a good or service to F.
Therefore, Y recognises the up-front fee over the 10-year franchise period.
9.4 Timing and pattern of revenue recognition

IFRS 15.B56, B60–B61 The nature of an entity’s promise in granting a licence to a customer is to provide the
customer with either a right to:
– access the entity’s IP; or
– use the entity’s IP.
A promise to provide the customer with a right to access the entity’s IP is satisfied
over time because the customer simultaneously consumes and receives benefit
from the entity’s performance of providing access to its IP as that performance
occurs. The entity applies the general guidance for measuring progress towards the
complete satisfaction of a performance obligation satisfied over time in selecting an
appropriate measure of progress.
A promise to provide the customer with a right to use the entity’s IP is satisfied at
a point in time. The entity applies the general guidance on performance obligations
satisfied at a point in time to determine the point in time at which the licence
transfers to the customer. However, revenue cannot be recognised before the
beginning of the period during which the customer can use and benefit from the
licence (i.e. before the start of the licence period).
9 Licensing | 221
9.4 Timing and pattern of revenue recognition |
An entity may enter into a contract with a customer to renew or extend an existing
licence to use the entity’s IP. If the renewal is agreed before the start of the
renewal period, then a question arises about when to recognise revenue for the
renewal. It appears that an entity should choose an accounting policy, to be applied
consistently, to recognise revenue for the renewal when:
– the renewal is agreed: on the basis that the renewal is regarded as a modification
of an existing contract in which the licence has already been delivered; or
– the renewal period starts: on the basis that this is the date from which the
customer can use and benefit from the renewal.
Example 11A – Right-to-access licence
Company S enters into a contract with Customer C on 15 November Year 0

to grant C a five-year licence to its IP, with the licence period beginning on
1 January Year 1 and ending on 31 December Year 5. S provides C with a copy
of the IP on 1 December Year 0. S determines that the licence provides a right
to access.
Because the licence provides C with a right to access S’s IP, S will recognise
the revenue from the licence over the five-year term (from 1 January Year 1 until
31 December Year 5) as it satisfies its performance obligation to provide C with
access to the IP. S cannot begin to recognise revenue until 1 January Year 1
when C can begin to use and benefit from the licence.
Example 11B – Right-to-use licence
Modifying Example 11A, assume that the licence provides Customer C with a
right to use Company S’s IP.
Because the licence provides a right to use its IP, S recognises the revenue from
the licence at a point in time on 1 January Year 1. This date is the first point in
time at which C:
– has obtained control of the licence based on an evaluation of the general
guidance on performance obligations satisfied at a point in time; and
– is able to use and benefit from the licence.
Example 12 – Renewal of a right-to-use licence
Company S enters into a contract with Customer C on 1 January Year 0 to grant

C a three-year licence to its IP for consideration of 100. The licence period is
from 1 January Year 1 to 31 December Year 3. S determines that the licence
provides a right to use and recognises the revenue from the licence at a point
in time on 1 January Year 1, when C obtains control of the licence and is able to
use and benefit from the licence.
On 1 January Year 3, S and C agree and approve a renewal of the licence for
a further three-year period for consideration of 100 payable at the date of the
agreement. There are no other changes to the licence (i.e. the other terms and
conditions of the licence and the IP remain the same). The renewal period is
from 1 January Year 4 to 31 December Year 6.
We believe that S should choose an accounting policy, to be applied
consistently, to recognise 100 revenue for the renewal on 1 January Year 3
(i.e. when the renewal is agreed) or 1 January Year 4 (i.e. when the renewal
period starts).
Application of the general guidance on performance obligations

satisfied at a point in time
IFRS 15.38 The standard states that a right-of-use licence is satisfied at a point in time and
that the indicators for determining when control transfers generally apply (see
Section 5.4). However, for licences of IP that are a right of use, the standard
adds an additional requirement that revenue cannot be recognised before the
beginning of the period in which the customer can begin to use and benefit
from the licence.
Although the point at which the customer can begin to use and benefit from
the licence will typically be readily determinable, the point-in-time transfer of
control indicators may not be applied to licences as easily as they might be
to physical goods. For example, there may not be ‘legal title’ to a licence and
it may be difficult to assess whether the customer has the significant risks
and rewards of a licence. However, the contract can be viewed as analogous
to title to a licence and availability of a copy of the IP (when applicable) as the
equivalent of ‘physical possession’. Assessing the entity’s right to payment in
a licence contract should not be significantly different from that assessment in
other scenarios.
9 Licensing | 223
9.5 Contractual restrictions and attributes of licence |
Consequently, control of a licence will generally transfer to the customer when:

– there is a valid contract between the parties;
– the customer has a copy or the ability to obtain a copy of the IP; and
– the customer can begin to use and benefit from the licence.
9.5 Contractual restrictions and attributes of

licences
IFRS 15.B62 The following factors are not considered when determining the nature of the entity’s
promise in granting a licence:
– restrictions of time, geography or use of the licence; and
– guarantees provided by the licensor that it has a valid patent to the underlying IP
and that it will maintain and defend that patent.
Example 13A – Licence of IP: Hold-back period
On 1 January Year 1, Film Studio F enters into a three-year contract to grant

Broadcaster B the exclusive right to air Film M in the US and Canada during
the contract term. B has the right to air M in the US immediately but, due
to an overlapping contract with a Canadian competitor, the rights to air the
film in Canada do not begin until 1 July Year 1 – i.e. there is a six-month hold-
back period.
F considers whether the contract grants B a single licence that is subject to a
use restriction (i.e. a single licence to show the film in the US from 1 January
Year 1 and in Canada from 1 July Year 1), or two licences (i.e. one licence to
show the film in the US and one licence to show the film in Canada).
F determines that the contract includes two promised licences based on

the following:
– the term of the contract preventing B from airing the film in Canada for the
first six months of the contract term leads to the rights to show the film in
Canada being a separate and additional right transferred on 1 July Year 1; and
– B does not control the additional right at 1 January Year 1 because it cannot
use and benefit from it in Canada before 1 July Year 1. This differentiates it
from the right to show the film in the US.
Therefore, the right to air the film in Canada represents a separate promise that
F has not yet transferred to B.
Example 13B – Licence of IP: Usage limitations
Modifying Example 13A, the rights to air Film M in the US and Canada both start
on 1 January Year 1. However, the terms of B’s rights to air the film extend only
to eight broadcasts in each territory during the three-year period and, as part of
the contract, B agrees not to air certain types of adverts during the film.
In this case, F determines that the contract is for a single licence because B can
begin to use and benefit from the rights conveyed in both the US and Canada
from 1 January Year 1. There are no additional rights transferred after 1 January
Year 1.
The term of the licence (three years), the geographic scope of the licence
(B’s US and Canadian networks only) and the usage limitations (limited to
eight showings per territory and restrictions on adverts during the film) are all
attributes of the licence.
No explicit guidance on distinguishing attributes of a licence from

additional licences
IFRS 15.IE304, BC414O–BC414R The standard does not include explicit guidance on distinguishing attributes of a
licence from additional licences, so judgement is required to determine when a
restriction creates multiple licences and when it is an attribute of the licence.
The basis for conclusions notes that an entity considers all of the terms in a
contract when considering whether promised rights result in the transfer of one
or more licences to the customer. This judgement is necessary to distinguish
between contractual provisions that create promises to transfer rights to use
the entity’s IP from contractual provisions that establish when, where and how
those rights may be used.
Example 59 of the standard illustrates that restrictions of time, geography and
use are considered as attributes of a single licence in a contract.
Distinguishing attributes of a single licence from additional

promises to transfer licences
A provision in a contract that requires the entity to transfer additional rights to

use or access IP that the customer does not already control generally describes
an additional promise for the entity to fulfil. In Example 13A in this chapter,
the provision restricting the customer’s ability to use the IP in Canada initially
means that, until those rights start, the entity has a remaining obligation to
transfer those rights that the customer does not already control. Because of
that provision, the contract in Example 13A could easily have been written as a
contract to grant two distinct licences (one to air Film M in the US and a second
licence to air M in Canada). The accounting outcome in a scenario such as
Example 13A does not depend on how the contract is written.
9 Licensing | 225
9.6 Sales- or usage-based royalties |
In contrast, Example 13B in this chapter illustrates that licences are, by nature,
a bundle of rights to IP that are often limited in duration and scope (geographic
and usage). The provisions describing the duration and scope of the customer’s
rights in Example 13B are distinguished from the requirement in Example 13A
that the entity transfer additional rights after some other rights have been
transferred (i.e. to fulfil a remaining promise to transfer those additional rights).
Substantial break between periods during which a customer is

able to use (or access) IP
In some cases, a substantial break between periods during which a customer

is able to use (or access) IP might suggest that those two separate periods
of time represent separate licences, even if the rights conveyed during each
period are the same. This scenario arises principally in the media industry and is
often referred to as a ‘broken windows’ scenario. The facts and circumstances
will need to be considered when deciding whether broken windows should be
accounted for as a single licence or multiple licences.
9.6 Sales- or usage-based royalties

IFRS 15.B63 For sales- or usage-based royalties that are attributable to a licence of IP, the amount
is recognised at the later of:
– when the subsequent sale or usage occurs; and
– the satisfaction or partial satisfaction of the performance obligation to which
some or all of the sales- or usage-based royalty has been allocated.
IFRS 15.B63A–B63B This is an exception to the general requirements and it applies when the:
– royalty relates only to a licence of IP; or
– licence is the predominant item to which the royalty relates (e.g. when the
customer would ascribe significantly more value to the licence than to the other
goods or services to which the royalty relates).
An entity does not split a royalty into a portion that is subject to the exception and
a portion that is subject to the guidance on variable consideration, including the
constraint (see Section 3.1).
If the exception does not apply, then the entity applies the general guidance on
variable consideration, including the constraint, to the royalty arrangement and
includes its estimate in the transaction price.
Example 14 – Royalty: Licence of IP is the predominant item
Film Distributor D licenses the right to show a film in cinemas for six weeks to
Film Company T. D has agreed to provide memorabilia to T for display at cinemas
and to sponsor radio adverts. In exchange, D will receive a royalty equal to 30%
of the ticket sales.
D has a reasonable expectation that T would ascribe significantly more value to
the licence than to the related promotional activities, and therefore D concludes
that the licence to show the film is the predominant item to which the sales-
based royalty relates.
D applies the royalties exception to the entire sales-based royalty and therefore
cannot recognise revenue when the promotional activities are provided based
on an estimate of the expected royalty amount.
If the licence, the memorabilia and the advertising activities were separate
performance obligations, then D would allocate the sales-based royalties to
each performance obligation when or as the subsequent sales occurred. Then
it would recognise the royalties allocated to each performance obligation based
on whether that performance obligation has been satisfied – e.g. whether the
licence, which is a right to use IP in this example, has been transferred to the
customer or whether the advertising services are complete.
Exception for sales- or usage-based royalties aligns the

accounting for different licence types
A key practical effect of the exception for sales- or usage-based royalties is

that it may reduce the significance of the distinction between the two types of
licences in certain circumstances. In particular, if the consideration for a licence
consists solely of a flat sales- or usage-based royalty for a distinct licence, then
an entity is likely to recognise it in the same, or a substantially similar, pattern,
irrespective of whether the licence provides the customer with a right to access
IP or a right to use IP.
Judgement is required to assess when a licence of IP is

‘predominant’
IFRS 15.B63A An entity may be entitled to a sales-based or usage-based royalty in exchange

for a licence and other goods or services in the contract, which may or may not
be distinct from the licence. Licences of IP are often bundled with other goods
or services, with the consideration taking the form of a sales- or usage-based
royalty for all goods or services in the contract. For example:
– software licences are commonly sold with PCs and other services (e.g.
implementation services) or hardware where there is a single consideration
in the form of a sales- or usage-based royalty;
9 Licensing | 227
– franchise licences are frequently sold with consulting or training services or

equipment, with ongoing consideration in the form of a sales-based royalty;
– biotechnology and pharmaceutical licences are often sold with R&D services
and/or a promise to manufacture the drug for the customer, with a single
consideration in the form of a sales-based royalty; or
– licences for digital media and a promise for promotional activities may be
sold with a single consideration in the form of a sales-based royalty.
The guidance specifies that the royalties exception applies when the licence is
the predominant item to which the royalty relates. ‘Predominant’ is not defined.
However, the standard says that “this may be the case when the customer
would ascribe significantly more value to the licence than to the other goods or
services to which the royalty relates”.
Significant judgement may be required to determine whether a licence is the
predominant item in an arrangement. For example, an entity may determine
that a licence of IP is the predominant item when it represents the major part or
substantially all of the value or utility of the bundle. Another entity may conclude
that the exception would apply when a licence of IP is the largest single item
in a bundle of goods or services. These different interpretations could result in
differences in practice and may give rise to differences in the transaction price
and timing of revenue recognition, because they could affect the conclusion on
whether the royalties exception applies to an arrangement.
Application of royalties exception to milestone payments
Company X enters into a contract to licence IP to Company Y. In exchange for

the licence, X is entitled to a 5 million milestone payment after Y has reached
50 million in sales.
The royalties exception generally applies to the milestone payment because the
payment is based on Y’s subsequent sales. Consequently, X does not recognise
any revenue for the variable amount until the subsequent sales occur. However,
this view does not extend to milestone payments that are determined with
reference to other events or indicators – e.g. regulatory approval or enrolment in
clinical trials.
For example, arrangements in the life sciences industry often include a licence
of IP of a drug and an obligation to perform R&D services, with a substantial
portion of the fee being contingent on achieving milestones such as regulatory
approval of the drug.
Guaranteed minimum payment – Right-to-use licence
For a right-to-use licence, any guaranteed minimum payment represents fixed

consideration – i.e. it is an amount payable by the customer that will not vary
based on sales, usage or any other metric. This fixed amount is recognised as
revenue at the point in time when the customer obtains control of the licence.
Royalties earned in excess of the guaranteed minimum are recognised as and
when the related sales or usage occurs.
Guaranteed minimum payment – Right-to-access licence
The standard does not prescribe a single approach for recognising revenue for
a right-to-access licence when the contract includes royalties with a minimum
guarantee. Instead, an entity chooses an approach that appropriately considers
all of the principles in the standard, including the royalty exception, selecting
measures of progress and the variable consideration allocation exception.
One acceptable approach is illustrated in Example 15B in this chapter.
Variable royalty rates – Right-to-use licence
An entity recognises revenue from a sales- or usage-based royalty when (or as)
the customer’s subsequent sales or usage occurs unless this method would
accelerate the recognition ahead of the entity’s performance in completing the
performance obligations. Therefore, when the royalty relates to a right-to-use
licence, it is generally recognised as and when sales or usage occur because
performance is complete.
One exception to this approach is when a declining rate is applied on a

retrospective basis – e.g. customers receive a refund or credit on previous
payments when the customer reaches a lower royalty rate. In these cases, the
entity estimates the ultimate royalty rate that it expects to be entitled to and
applies that to the sales or usage. The entity updates that estimate over the
licence term.
9 Licensing | 229
Variable royalty rates – Right-to-access licence
An entity recognises revenue from a sales- or usage-based royalty when (or

as) the customer’s subsequent sales or usage occur unless this method would
accelerate the recognition ahead of the entity’s performance in completing
the performance obligations. Therefore, when the royalty decreases over the
licence term an entity evaluates whether a portion of the royalty rate needs to
be deferred to ensure that the entity does not recognise revenue ahead of its
performance. Conversely, when the royalty rate increases over the licence term
the entity generally recognises revenue at the current royalty rate because an
entity cannot recognise revenue before sales or usage occurs.
Allocating sales- or usage-based royalties to multiple

An entity may enter into a contract with multiple performance obligations that
consist of a licence of IP and another good or service that is transferred over
a different time period. If the requirements to allocate variable consideration
entirely to one performance obligation are not met, then an entity allocates the
sales- or usage-based royalties to multiple performance obligations.
The standard is not clear about how an entity allocates the consideration to
its performance obligations when the contract includes sales- or usage-based
royalties predominantly associated with a licence of IP and a guaranteed
minimum. Multiple approaches could be acceptable if they are consistent with
the allocation objective and application of the royalty exception. We believe that
the following are examples of acceptable approaches.
– Approach 1: Allocate the fixed consideration and variable consideration
separately based on relative stand-alone selling prices.
– Approach 2: Estimate the total transaction price (including royalties) and
allocate that amount to each performance obligation subject to a cumulative
recognition constraint.
Example 15A – Software licence with a guaranteed minimum (1)
Company M enters into a five-year arrangement to license software to

Customer C. The software licence provides C with the right to use M’s software
– i.e. revenue is recognised at a point in time. The consideration for the licence
is a sales-based royalty of 5% of C’s gross sales of products that include M’s
software, with a minimum guaranteed amount of 5,000.
The 5,000 guaranteed royalty amount is fixed consideration and is recognised

in the same manner as any other fixed consideration – i.e. as revenue when the
customer obtains control of the licence. Any royalties in excess of the minimum
guaranteed amount are recognised when C’s subsequent sales – i.e. those
above the minimum – occur.
Example 15B – Software licence with a guaranteed minimum (2)
Modifying Example 15A, the software licence provides C with a right to access
M’s IP and revenue is recognised over time.
M determines that the guaranteed minimum is substantive and that it is
appropriate to recognise the guaranteed minimum amount on a straight-line
basis over the licence period. M recognises any royalty amounts above the
guaranteed minimum only after the guaranteed minimum of 5,000 has been
exceeded. However, other methods may also be appropriate, as long as a single
measure of progress is used for the performance obligation.
Conversely, if the guaranteed minimum is considered non-substantive then M
recognises revenue as and when sales occur.
Example 16 – Allocation of guaranteed minimum among multiple

Tech Company T enters into a three-year arrangement to license its technology

to Customer C along with a promise to provide when-and-if-available upgrades
developed during the licence term.
T concludes that the licence and promise to provide when-and-if-available
upgrades are two distinct performance obligations.
– The licence provides C with a right to use the technology, which is a
performance obligation satisfied at a point in time.
– The right to when-and-if-available upgrades is a performance obligation
satisfied over time because C simultaneously receives and consumes the
benefits of having access to when-and-if-available upgrades continuously
throughout the contract term.
T receives a royalty of 10% of C’s sales subject to a minimum guaranteed
amount of 10,000. T estimates that the total consideration (fixed plus variable)
will be 50,000.
T estimates the stand-alone selling price of the licence and when-and-if-
available upgrades to be 15,000 and 35,000, respectively. T concludes that
the royalty is predominantly associated with a licence of IP because both
performance obligations are related to providing IP.
9 Licensing | 231
C’s gross sales and the related royalties earned each year are as follows. This
information is not known at the beginning of the contract.
Year 1 Year 2 Year 3 Total
Gross sales 150,000 250,000 100,000 500,000

Royalties 15,000 25,000 10,000 50,000
Approach 1: Allocate fixed and variable consideration separately

T allocates the fixed fee (guaranteed minimum) of 10,000 on a relative stand-
alone selling price basis.
Allocation of
Performance Stand-alone selling guaranteed
obligation price % minimum
Licence 15,000 30% 3,000

Upgrades 35,000 70% 7,000
Total 50,000 100% 10,000
T allocates the estimated variable royalty (in excess of the minimum) of 40,000
between the two performance obligations on a relative stand-alone selling price
basis as future usage and sales occur.
T recognises the variable amounts allocated to the when-and-if-available
upgrades in the period the amounts are earned because the performance
obligation is a series of distinct time periods and T meets the criteria to allocate
the fees directly to the distinct periods in which the sales occur as follows:
– the fees relate to the customer’s past usage and the licence and when-and-if-
available upgrades; and
– the allocation is consistent with the allocation objective because the fee is
consistent from period to period and C’s greater usage reflects additional
value to C (see 4.2.2).
The following table summarises the allocation and recognition for each
performance obligation during the three-year contract term.
End of End of End of

Inception Year 1 Year 2 Year 3 Total
Fixed
Licence 3,0001 - - - 3,000
Upgrades - 2,333 2
2,333 2
2,333 2
7,000
Variable
Licence - 1,5003 7,5005 3,0007 12,000
Upgrades - 3,5004 17,5006 7,0008 28,000
Cumulative
revenue
Licence 3,000 4,500 12,000 15,000 15,000
Upgrades - 5,833 25,666 35,000 35,000
Notes
1. 10,000 minimum × 30% allocation. This amount is recognised immediately on transfer

of the licence because it is a right-to-use licence recognised at a point in time.
2. 10,000 minimum × 70% allocation × 1/3 complete. Only a portion is recognised

each period because this amount is recognised over time.
3. 5,000 royalty above the minimum (15,000 - 10,000) × 30% allocation.
4. 5,000 royalty above the minimum (15,000 - 10,000) × 70% allocation.
5. 25,000 additional royalty × 30% allocation.
Approach 2: Allocate fixed and variable consideration together

T allocates the 50,000 estimated transaction price on a relative stand-alone
selling price basis as follows:
– 15,000 to the licence; and
– 35,000 to the when-and-if-available upgrades.
9 Licensing | 233
When (or as) the performance obligations are satisfied, T recognises as revenue
the lesser of the amount allocated to the performance obligations satisfied or
the amount that is no longer subject to the royalty constraint.
Inception Year 1 Year 2 Year 3 Total
Allocated to (A):
Licence 15,0001 - - - 15,000
Upgrade - 11,667 3
11,667 3
11,667 3
35,000
Cumulative 15,000 26,667 38,333 50,000 N/A
Royalty due (B):

Annual 10,0002 5,0004 25,0005 10,0006 40,000
Cumulative 10,000 15,000 40,000 50,000 N/A
Lesser of A
and B 10,000 15,000 38,333 50,000 N/A
Less:
previously
recognised - (10,000) (15,000) (38,333) N/A
Revenue
recognised 10,000 5,000 23,333 11,667 50,000
Notes
1. The right-to-use licence is transferred at a point in time. As such, the performance

obligation is satisfied on transfer and the amount allocated to that performance
obligation is 15,000.
2. There is a guaranteed minimum of10,000 in the contract.
3. 35,000 allocated to the upgrades / 3 years.
4. 15,000 in royalties earned during Year 1 - 10,000 minimum already recorded.
5. 25,000 additional royalties earned during Year 2.
6. 10,000 additional royalties earned during Year 3.
10 Other application issues

10.1 Sale with a right of return
Overview
Under the standard, when an entity makes a sale with a right of return it
recognises revenue at the amount to which it expects to be entitled by applying
the variable consideration and constraint guidance set out in Step 3 of the
model (see Chapter 3). The entity also recognises a refund liability and an asset
for any goods or services that it expects to be returned.
IFRS 15.B20 An entity applies the accounting guidance for a sale with a right of return when a
customer has a right to:
– a full or partial refund of any consideration paid;
– a credit that can be applied against amounts owed, or that will be owed, to the
entity; or
– another product in exchange (unless it is another product of the same type,
quality, condition and price – e.g. exchanging a red sweater for a white sweater).
IFRS 15.B21–B22 An entity does not account for its stand-ready obligation to accept returns as a
In addition to product returns, the guidance also applies to services that are
provided subject to a refund.
IFRS 15.B26–B27 The guidance does not apply to:

– exchanges by customers of one product for another of the same type, quality,
condition and price; and
– returns of faulty goods or replacements, which are instead evaluated under the
guidance on warranties (see Section 10.2).
10 Other application issues | 235
10.1 Sale with a right of return |
IFRS 15.B21, B23, B25 When an entity makes a sale with a right of return, it initially recognises the
following.
Item Measurement
Revenue Measured at the gross transaction price, less the expected

level of returns calculated using the guidance on estimating
variable consideration and the constraint (see Section 3.1)
Refund Measured at the expected level of returns – i.e. the difference

liability between the cash or receivable amount and the revenue as
measured above
The nature of such a refund liability is different from contract
liabilities and therefore it is not presented as such
Return Measured with reference to the carrying amount of the

asset products expected to be returned less the expected recovery
costs, including potential decreases in the value to the entity
of returned products
The nature of this return asset is different from trade and
other receivables and therefore it is not presented as such
Cost of Measured as the carrying amount of the products sold less

goods sold the return asset as measured above
Reduction Measured as the carrying amount of the products transferred

of inventory to the customer
IFRS 15.B24–B25 The entity updates its measurement of the refund liability and return asset at each
reporting date for changes in expectations about the amount of the refunds. It
recognises adjustments to the:
– refund liability as revenue; and
– return asset as an expense.
Example 1 – Sale with a right of return
Retailer B sells 100 products at a price of 100 each and receives a

payment of 10,000. The sales contract allows the customer to return any
undamaged products within 30 days and receive a full refund in cash. The
cost of each product is 60. B estimates that three products will be returned
and a subsequent change in the estimate will not result in a significant
revenue reversal.
B estimates that the costs of recovering the products will not be significant and
expects that the products can be resold at a profit.
Within 30 days, two products are returned.
B records the following entries on:

– transfer of the products to the customer to reflect its expectation that three
products will be returned;
– return of the two products; and
– expiry of the right to return products.
Debit Credit
Sale
Cash 10,000
Refund liability 3001
Revenue 9,700
To recognise sale excluding revenue on products
expected to be returned
Return asset 1802
Cost of sales 5,820
Inventory 6,000
To recognise cost of sales and right to recover
products from customers
Two products returned

Cash 2003
To recognise the refund for product returned
Inventory 1204
Return asset 1204
To recognise product returned as inventory
Right of return expires

Revenue 100
To recognise revenue on expiry of right of return
Cost of sales 60
Return asset 60
To recognise cost of sales on expiry of right to
recover products from customers
Notes
1. 100 × 3 (the price of the products expected to be returned).
2. 60 × 3 (the cost of the products expected to be returned).
3. 100 × 2 (the price of the products returned).
4. 60 × 2 (the cost of the products returned).
10.1 Sale with a right of return |
Partial refunds are measured based on the portion expected to be

refunded
IFRS 15.55, B23–B25 The measurement of a refund liability reflects the amount expected to be
refunded to the customer. Therefore, when a right of return allows the customer
to return a product for a partial refund (e.g. 95 percent of the sales price),
the refund liability (and the corresponding change in the transaction price)
is measured based on the portion of the transaction price expected to be
refunded. For example, this would be the number of products expected to be
returned multiplied by 95 percent of the selling price.
Restocking fees and costs
IFRS 15.55, B23–B25 An entity sometimes charges a customer a restocking fee when a product is
returned. The restocking fee is generally intended to compensate the entity for
costs associated with the product return (e.g. shipping and repacking costs) or
the reduction in the selling price that an entity may achieve when reselling the
product to another customer.
A right of return with a restocking fee is similar to a right of return for a partial
refund. Therefore, a restocking fee is included as part of the estimated
transaction price when control transfers – i.e. the refund liability is based on the
transaction price less the restocking fee.
Similarly, the entity’s expected costs related to restocking are reflected in the
measurement of the return asset when control of the product transfers. This is
consistent with the guidance in the standard that any expected costs to recover
returned products should be included by reducing the carrying amount of the
return asset recorded for the right to recover those products.
For example, assume that an entity sells 20 widgets to a customer for 30 each
and the cost of each widget is 15. The customer has the right to return a widget
but is charged a 10% restocking fee. The entity expects to incur restocking costs
of 2 per widget returned. The entity estimates returns to be 5%.
When control of the widgets transfers to the customer, the entity recognises
the following.
Item What to include Amount Calculation
Revenue Widgets not to 573 (191 × 30) + (1 × 32)

be returned plus
restocking fee
Refund liability Widget expected 27 (1 × 30) - 32

to be returned
less restocking
fee
Return asset Cost of widget 13 (1 × 15) - 2

expected to be
returned less
restocking cost
Notes
1. Widgets not expected to be returned, calculated as 20 widgets sold less one (20 × 5%)
expected to be returned.
2. Restocking fee, calculated as 30 × 10%.
Conditional right of return
IFRS 15.55, B23, B70–B75 The standard does not distinguish between conditional and unconditional rights
of return and both are accounted for similarly. However, for a conditional right
of return the probability that the return condition would be met is considered
in determining the expected level of returns. For example, a food production
company only accepts returns of its products that are past a sell-by date.
Based on historical experience, the company assesses the probability that the
products will become past their sell-by date and estimates their return rate.
Historical experience may be a source of evidence for estimating

returns
When estimating the amount of consideration expected to be received from a

sales contract with a right of return, an entity may consider historical experience
with similar contracts to make estimates and judgements. Using a group of
similar transactions as a source of evidence is not itself an application of the
portfolio approach (see Section 6.4 and 3.1.1).
When the entity elects to estimate the transaction price using the expected
value method and uses a portfolio of data to determine the expected value
of an individual contract, the estimated amount might not be a possible
outcome for an individual contract (see 3.1.1). Because a sale with a right of
return represents variable consideration, an entity is also required to apply the
constraint to its estimate.
IFRS 15.IE110–IE115 The standard includes Example 22 illustrating how to determine the transaction
price for a portfolio of 100 individual sales with a right of return. In the example,
the entity concludes that the contracts meet the conditions to be accounted for
at a portfolio level and determines the transaction price for the portfolio using
an expected value approach to estimate returns. However, as explained above
the entity could achieve the same accounting outcome by using the portfolio
as a source of data, rather than assessing whether the contracts meet the
conditions to be accounted for at a portfolio level.
10.2 Warranties |
10.2 Warranties
Overview
Under the standard, an entity accounts for a warranty (or part of a warranty) as a
performance obligation if the warranty is distinct, including:
– the customer has an option to purchase the warranty separately; or
– additional services are provided as part of the warranty.
Otherwise, warranties are accounted for under the provisions standard.
10.2.1 Applying guidance on warranties

IFRS 15.B29 Under the standard, a warranty is considered a performance obligation if it is distinct
under the Step 2 criteria (see Chapter 2). If the customer has an option to purchase
the good or service with or without the warranty, then the warranty is a distinct
service. If the warranty includes a service beyond assuring that the good complies
with agreed specifications, then it is distinct.
IFRS 15.B29–B30, IAS 37 When a warranty is not sold separately, the warranty or a portion of it may still be
a performance obligation if it provides the customer with a service in addition to
the assurance that the product complies with agreed specifications. A warranty
that covers only a product’s compliance with agreed specifications (an ‘assurance
warranty’) is accounted for under the provisions standard. For further discussion of
how to distinguish between an assurance- and service-type warranty, see 10.2.2.
IFRS 15.B29 If the warranty – or part of it – is considered to be a performance obligation, then
the entity allocates a portion of the transaction price to the service performance
obligation by applying the requirements in Step 4 of the model (see Chapter 4).
IFRS 15.B32 If an entity provides a warranty that includes both an assurance element and a
service element and the entity cannot reasonably account for them separately, then
it accounts for both of the warranties together as a single performance obligation.
IFRS 15.B33, IAS 37 A legal requirement to pay compensation or other damages if products
cause damage is not a performance obligation and is accounted for under the
provisions standard.
Example 1 – Sale of a product with a warranty
IFRS 15.IE223–IE229 Manufacturer M grants its customers a standard warranty with the purchase
of its product. Under the warranty, M provides assurance that the product
complies with agreed specifications and will operate as promised for three
years from the date of purchase.
Customer C also chooses to purchase an extended warranty for two

additional years.
In this example, M concludes that there are two performance obligations in the
contract.
Contract
Performance Not a performance

obligations obligation
Transfer
Extended Standard
of the
warranty warranty
product
The extended warranty is a performance obligation because it can be purchased

separately and is distinct based on the Step 2 criteria (see Chapter 2).
The component of the standard warranty that provides assurance that the
product complies with stated specifications is an assurance-type warranty,
and therefore is not a performance obligation. As a consequence, M accounts
for the standard warranty under the provisions standard when control of the
product transfers to the customer.
A refund for defective services may be variable consideration

rather than a warranty
IFRS 15.B20–B27 The guidance in the standard on warranties is intended to apply to services as
well as goods. However, it does not further explain how the concept should be
applied to services.
In a contract for the delivery of services, an entity may offer to ‘make good’ or
offer a refund. If an entity offers to ‘make good’ – e.g. to repaint an area that
a customer was not pleased with – then it considers this in determining the
timing of the transfer of control and revenue recognition.
If an entity offers a refund to customers who are dissatisfied with the service
provided, then it applies the guidance on a sale with a right of return (see
Section 10.1) and follows the guidance on estimating variable consideration in
determining the transaction price for the service being provided (see Chapter 3).
10.2 Warranties |
Defective product returns in exchange for compensation
IFRS 15.B20–B27 An entity may offer compensation in the form of cash or credit to a customer,
rather than repairing or replacing the defective product. Unlike returns of faulty
goods or replacements, this refund is generally accounted for using the right of
return guidance (see Section 10.1) and not the guidance on warranties.
Liquidated damages and similar types of contractual terms
IFRS 15.51 Many contracts contain terms providing for liquidated damages and similar
compensation to the customer on the occurrence or non-occurrence of certain
events. These terms may be considered variable consideration, given that the
standard identifies penalties as variable consideration.
However, in some circumstances the terms may be similar to a warranty
provision. For example, if a third party fixes a defective product sold by an entity
and the entity reimburses the customer for costs incurred, then that term may
be similar to a warranty provision.
Amounts considered closer in nature to a warranty provision are accounted for
as an assurance- or service-type warranty.
Judgement is required to distinguish those terms that are accounted for as
warranties from the more common scenarios in which the terms give rise to
Some warranty arrangements may be in the scope of the

insurance standard
IFRS 15.BC373, 4.4(a) Product warranties issued directly by a manufacturer, dealer or retailer are in
the scope of the warranty guidance in the revenue standard. Warranties issued
directly by a third party are in the scope of the insurance standard.
In more complex cases, an entity sells a warranty separately but the
arrangement involves a third party or multiple covers. In these cases, the entity
may need to apply judgement to determine which party issues the warranty and
whether the arrangement, or a component of it, is in the scope of the insurance
standard.
10.2.2 Distinguishing between an assurance- and a service-type

warranty
An entity distinguishes between the types of distinct product warranties as follows.
Does the customer have the option to Yes

Service warranty
purchase the warranty separately?
Account for the

No warranty or part
of the warranty
Does the promised warranty, or a part as a
of the promised warranty, provide the Yes performance
customer with a service in addition to the obligation
assurance that the product complies
with agreed specifications?
No
Assurance warranty
Not a performance obligation. Account for

under the provisions standard
IFRS 15.B31 To assess whether a warranty provides a customer with an additional service, an
entity considers factors such as:
– whether the warranty is required by law: because such requirements typically
exist to protect customers from the risk of purchasing defective products;
– the length of the warranty coverage period: because the longer the coverage
period, the more likely it is that the entity is providing a service, rather than just
guaranteeing compliance with an agreed specification; and
– the nature of the tasks that the entity promises to perform.
Example 2 – Lifetime warranty
IFRS 15.B31 Luggage Company L is a leading manufacturer in the luggage industry. L

provides a lifetime warranty on all suitcases. If a suitcase is broken or damaged,
then L will repair or replace it free of charge.
There are currently no regulations in the luggage industry on warranties.
10.2 Warranties |
L assesses whether the lifetime warranty is a service-type warranty as follows.
Factor Rationale
No legal In this example, there is no law that requires L to make

requirement a promise for the lifetime of the product. Therefore,
this factor suggests that the warranty is a separate
Longer In this example, the length of the warranty is for the life of
coverage the suitcase, as compared with other manufacturers that
period offer warranties for a specific period. Therefore, this factor
suggests that the warranty is a separate performance
obligation.
Promises In this example, the nature of the tasks not only includes
beyond agreed repairing or replacing a suitcase that does not meet the
specifications promised specifications, but also includes repairing
damage that occurs after the customer obtains control
of a suitcase. Therefore, the warranty goes beyond
the promise that the suitcase complies with agreed
specifications, which suggests that the warranty is a
separate performance obligation.
Based on its analysis, L concludes that the lifetime warranty is a service in

addition to the assurance that the product complies with agreed specifications.
It therefore accounts for the service as a separate performance obligation.
‘Reasonably account’ threshold is undefined
The standard requires an entity that cannot reasonably account for a service-
type warranty and an assurance-type warranty separately to account for
them together as a single performance obligation. Because the ‘reasonably
account’ threshold is not defined in the standard, entities will need to exercise
judgement in applying this guidance.
Length of the warranty period is an indicator of the type of

warranty, but is not always determinative
IFRS 15.B31 The standard lists the length of the warranty period as a factor to consider
when assessing whether the warranty provides a customer with a service.
However, it is only one of the factors. An entity usually considers the length
of the warranty in the context of the specific market, including geography and
product line. In addition to the length of the warranty period, the nature of costs
incurred in performing the warranty work may provide evidence of the nature of
the warranty promise.
Repairs outside the warranty period as a customary practice
IFRS 15.B28 An entity may have a customary business practice of providing repairs outside
the warranty period – i.e. an ‘implied warranty’. In some cases, it may not be
clear if the repairs provided during the implied warranty period are an assurance-
or service-type warranty.
For example, if an entity determines that the repairs made during the implied
warranty period generally involve correcting defects that existed at the time of
sale, then the repairs could be an assurance-type warranty. Conversely, if the
entity determines that the repairs made during the implied warranty period
provide a service to the customer beyond fixing defects that existed at the time
of sale, then the repairs could be a service-type warranty.
An entity considers all facts and circumstances in making an assessment of
whether an implied warranty is an assurance- or service-type warranty.
An ‘extended warranty’ may be a service-type warranty or an

assurance-type warranty
A warranty that is marketed as being an ‘extended warranty’ may be a service-

type warranty, but the facts will need to be evaluated to determine whether
it provides service beyond the assurance that the product meets the agreed
specifications. The mere labelling of a warranty as ‘extended’ or ‘enhanced’ is
not determinative.
An entity considers all facts and circumstances and the factors included in
the standard in making that determination. This includes, but is not limited to,
considering the length of the coverage period.
10.3 Principal vs agent considerations
Overview
When another party is involved in providing goods or services to a customer, an

entity evaluates the nature of its promise to the customer. If an entity obtains
control of another party’s goods or services before transferring control to the
customer, then the entity’s promise is to provide the goods or services itself.
Therefore, the entity is acting as a principal.
However, if the entity does not control the good or service before it is
transferred to the customer, then the entity is acting as an agent and arranges
for that good or service to be provided by another party.
An entity identifies each specified good or service to be transferred to the
customer and determines whether it is a principal or agent for each one. An
entity may be a principal for some goods and services and an agent for others in
a contract to transfer multiple goods or services.
10.3 Principal vs agent considerations |
10.3.1 Unit of account

IFRS 15.B34–B34A When other parties are involved in providing goods or services to a customer, the
entity determines whether the nature of its promise is a performance obligation
to provide the specified goods or services itself or to arrange for them to be
provided by another party – i.e. whether it is a principal or an agent. It makes
this determination by identifying each specified good or service promised to the
customer in the contract and evaluating whether the entity obtains control of the
specified good or service before it is transferred to the customer – i.e. the unit of
account is the specified good or service.
A ‘specified good or service’ is the distinct good or service (or distinct bundle
of goods or services) to be provided to the customer specified in Step 2 (see
Chapter 2).
Because an entity evaluates whether it is a principal or an agent for each specified

good or service to be transferred to the customer, it is possible for the entity to be a
principal for one or more specified goods or services and an agent for others in the
same contract.
The specified good or service to be transferred to the customer may in some cases
be a right to an underlying good or service that will be provided by another party.
Example 1 – Specified good or service is the underlying product

ordered
Company V operates a website from which it sells Company T’s products.

Customers place orders directly on the website. V passes orders on to T, which
ships the products directly to customers.
In this case, the specified good or service is the underlying product ordered
rather than a right to that product.
Example 2 – Specified good or service is a right to a specified good

or service
Company Y is a ticket-selling agent that sells airline tickets. The tickets give
customers the right to travel with a specific airline.
In this case, the specified good or service is the right to the flight. As such,
the principal-agent assessment focuses on who controls that right rather than
the underlying flight itself. In these cases, the fact that Y will not provide the
underlying service is not determinative.
Unit of account is the specific good or service
IFRS 15.B34, BC385Q The evaluation focuses on the promise to the customer and the unit of account
is the specified good or service. A specified good or service is a distinct good
or service (or a distinct bundle of goods or services) to be provided to the
customer. That is, the analysis of whether an entity acts as a principal or an
agent is performed at the performance obligation level. If individual goods and
services are not distinct from one another, then they represent inputs into a
combined promise that is the specified good or service that the entity assesses.
The specified good or service may be a right
IFRS 15.B35A(b) The specified good or service to be transferred to the customer may in some
cases be a right to an underlying good or service that will be provided by
another party. For example, a travel website may sell an airline ticket that gives
the customer the right to fly on a particular airline or an entity may provide a
voucher that gives the holder the right to a meal at a specified restaurant.
In these cases, the principal vs agent assessment is analysed based on who
controls the right to the underlying good or service. That is, an entity may be a
principal in a transaction relating to a right (e.g. sale of a voucher that gives the
customer the right to a meal) even if another party controls and transfers the
underlying good or service (e.g. the flight or the meal) to the end customer.
IFRS 15.IE239–IE248F An entity may be a principal in a transaction relating to a right if it has the ability
to direct the use of the right to the underlying service because it has committed
itself to purchasing the right and has inventory risk. The entity’s ability to
establish the price that the customer would pay for the right may also be a
relevant indicator to consider.
10.3.2 Control assessment
Goods or Goods or
services services
Supplier Intermediary End customer
Obtains Does not

control obtain control
Principal Agent
IFRS 15.B35 If an entity obtains control of a good or a right to services in advance of transferring
those goods or services to the customer, then the entity is a principal. Otherwise, it
is an agent.
IFRS 15.33 ‘Control’ is the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the goods or services (or prevent others from doing so).
IFRS 15.B35A When another party is involved, an entity that is a principal obtains control of:
– a good from another party that it then transfers to the customer;
– a right to a service that will be performed by another party, which gives the entity
the ability to direct that party to provide the service on the entity’s behalf; or
– a good or a service from another party that it combines with other goods or
services to produce the specified good or service promised to the customer.
IFRS 15.B77–B78, B81 To determine whether it controls a specified good or service before it is transferred
to the customer, the entity acting as an intermediary applies the general guidance
on transfer of control (see Section 5.4).
IFRS 15.B34A, B37 If the assessment based on the general guidance on transfer of control is not
conclusive, then an entity also considers the specific indicators of whether it acts as
a principal. These indicators include, but are not limited to, the following.
Indicator Relevant considerations
The entity The entity:

is primarily
– is responsible for acceptability of the specified
responsible for
good or service
providing specified
goods or services – has discretion with respect to accepting and
rejecting orders from customers
– can source the good or service ordered by the
customer from more than one supplier
– is responsible for delivery and any loss or damage
between pick up from the supplier and delivery to
the end customer
– is responsible for the sales strategy
– is the party the customer believes is responsible
for fulfilling the promise
The entity has The entity:

inventory risk
– obtains, or commits itself to obtaining, the
specified good or service before obtaining a
contract with a customer
– is liable for damage and product loss for inventory
in its possession before sale to the end customer,
including loss in inventory value
– is liable for customer returns
– commits to a minimum order quantity
– has no right to return unsold inventory to the
supplier
Indicator Relevant considerations
The entity has The amount paid to the supplier is:

discretion in
– a fixed price per unit
establishing prices
for specified goods – not a commission or fee basis, which is fixed
or services in terms of either an amount of currency or a
percentage of the value of the underlying goods
or services
IFRS 15.B37A The above indicators and considerations are not exhaustive. To assess whether it
obtains control, an entity needs to carefully assess its facts and circumstances,
including the nature of the specified goods or services and the terms and conditions
of the contracts. The indicators and conditions may be more or less relevant to the
assessment of control, depending on the nature of the specified goods or services
and the terms and conditions of the contract. In addition, different indicators may
provide more persuasive evidence in different contracts.
IFRS 15.B35, B38 An entity that is a principal in a contract may satisfy a performance obligation by
itself or it may engage another party – e.g. a subcontractor – to satisfy some or all
of a performance obligation on its behalf. However, if another party assumes an
entity’s performance obligation so that the entity is no longer obliged to satisfy
the performance obligation, then the entity is no longer acting as the principal and
therefore does not recognise revenue for that performance obligation. Instead,
the entity evaluates whether to recognise revenue for satisfying a performance
obligation to obtain a contract for the other party – i.e. whether the entity is acting
as an agent.
Example 3 – Entity arranges for the provision of goods or services
IFRS 15.IE231–IE233 Internet Retailer B operates a website that enables Customer E to buy goods
from a range of specific suppliers that deliver the goods directly to E. The
website facilitates payment between the supplier and E at prices set by the
supplier, and B is entitled to commission of 10% of the sales price. E pays in
advance and all orders are non-refundable.
B notes that each supplier delivers its goods directly to E and that B itself does
not control the goods. In reaching the conclusion that it does not control the
goods before they are transferred to E, B makes these observations.
– The supplier is primarily responsible for fulfilling the promise to provide the
goods to E (i.e. by shipping the goods to E). B is not obliged to provide the
goods to E if the supplier fails to deliver and is also not responsible for the
acceptability of the goods delivered by the supplier.
– B does not take inventory risk at any time before or after the goods are
transferred to E (because the goods are shipped directly by the supplier to
E), B does not commit to obtain the goods from the supplier before they are
purchased by E and B is not responsible for any damaged or returned goods.
– B does not have discretion in establishing prices for the goods because the
sales price is set by the supplier.
Consequently, B concludes that it is an agent and that its performance

obligation is to arrange for the supplier to provide the goods. When B satisfies
its promise to arrange for the supplier to provide the goods to E – which, in this
example, is when the goods are purchased by E – B recognises revenue at the
amount of the commission to which it is entitled.
Example 4 – Entity is an agent and a principal for sales of virtual or

intangible goods
IFRS 15.IE248A–IE248F Company H contracts to provide recruiting services. As part of the contract,
Customer J agrees to obtain a licence to access a third party’s database of
information on potential recruits. H arranges for this licence and collects
payment from J on behalf of the third party database provider. However, the
database provider sets the price to J for the licence and is responsible for
providing technical support.
H concludes that the recruitment services and the database access are distinct.
H considers the control principle and indicators to determine whether it controls
the specified goods and services before they are transferred to J.
H concludes that it is the principal in relation to the recruitment services

because it performs those services itself. In contrast, H concludes that it is an
agent in relation to the promise to provide access to the third party’s database
because H does not control access to the database before it is transferred to J
for the following reasons.
– H is not responsible for fulfilling the promise to provide access to the
database access.
– H does not have inventory risk because it does not purchase, or commit to
purchasing, the database access from the database provider.
– H does not have discretion in setting the price for the database access.
Principal-agent indicators support application of the general

control principle, but cannot override it
When evaluating whether an entity obtains control of the specified good or

service, an entity first applies the general definition of control and relevant
indicators. To help it make this assessment, the entity may also use the
principal-agent indicators.
The principal-agent indicators are helpful when the overall assessment of
control is unclear or highly judgemental. However, the key consideration
remains whether the entity obtains control; if the conclusion of the control
evaluation is clear, then the principal-agent indicators cannot override
this conclusion.
Certain conditions may help with control determination
When assessing whether the entity acting as intermediary has obtained control
of the specified good or service before it transfers to the end customer, the
following general control considerations may be helpful.
– Intermediary does not obtain control: agent. The supplier has a substantive
unconditional right to recall the inventory before sale to an end customer, or
the supplier and the intermediary enter into a consignment arrangement and
control passes only on sale to the end customer.
– Intermediary obtains control: principal. The supplier and the intermediary
enter into a bill-and-hold arrangement and all of the criteria for the transfer of
control are met (see Section 5.7).
No individual indicator is generally determinative
IFRS 15.B37 There is no specific hierarchy for the indicators and an entity considers all of
the indicators in making the assessment. The assessment of whether the
entity controls the specified good or service before it is transferred to the
customer does not depend on whether one or more of the indicators are met
or on a majority evaluation of the indicators. For instance, meeting two of the
three indicators, or not meeting two of the three indicators, does not in itself
determine the conclusion of the control evaluation.
The indicators are intended to inform the control evaluation and, depending
on the facts and circumstances, provide more or less relevant evidence in that
evaluation. Therefore, meeting one (or more) of the indicators cannot override
other more relevant evidence of whether the entity controls the specified
good or service before it is transferred to the customer in accordance with the
control principle.
Assessing the relevance of the indicators may be challenging when it is unclear
whether the entity or other party bears the responsibility, or when there are
shared responsibilities between the entity and other party. For example, an
entity that does not have primary responsibility for providing the specified good
or service or inventory risk may have discretion to set prices. In this case, the
entity makes an overall assessment of all of the facts and circumstances. This
may include assessing whether the discretion to set prices is merely a way for
the entity to generate additional revenue while arranging for another entity to
provide the specified goods or services, or evidence that the entity is acting as
a principal.
Providing a significant integration service is determinative
IFRS 15.B35A(c), BC385R When a customer contracts for a combined output of significantly integrated
goods or services and the entity is the party that provides the significant
integration service, the entity is the principal for the combined output. In these
cases, the entity controls the specified good or service (the combined output)
before it transfers control to the customer because it controls the inputs
necessary to perform the significant integration service.
Entity obtains only flash title before transfer to the customer
IFRS 15.B35 A ‘flash title’ scenario is common in the retail and commodity industries, in
which a retailer or a commodity dealer does not take title to the goods or
services until the point of sale to a customer and the end customer immediately
takes control after that.
Although taking title may indicate that an entity can direct the use of and obtain
substantially all of the remaining benefits of a good, it is not determinative that
control has transferred. For example, taking title to a good only momentarily
does not in and of itself mean that an entity controls the specified good or
service before it is transferred to the customer. In contrast, an entity could
control a good before obtaining title.
When an entity obtains only flash title to the specified good, the principal-
agent evaluation will focus on whether it obtains control of the specified good
or service before obtaining flash title and a consideration of the entity’s and
supplier’s rights before the transfer of the good to the end customer. All facts
and circumstances will need to be considered when evaluating the control
principle circumstances.
Entity may still be principal for tangible asset even if it does not
take physical possession
Although physical possession is an indicator that the entity has the ability to
direct the use of and can obtain substantially all of the remaining benefits of an
asset, it is not determinative.
If an entity does not take physical possession of the asset – e.g. in
arrangements when goods are shipped directly from the supplier to the
customer – it might still control the specified good or service when it:
– has the ability to direct or redirect the asset for other uses (for its own use or
to other customers);or
– can restrict the ability of the customer or supplier to direct the use of the
asset.
Example 5 – Entity is a principal for advertising services provided

by a subcontractor
Company D provides advertising services to customers. D enters into a

subcontract with a multinational online video sharing company, F. Under the
subcontract, F places all of D’s customers’ adverts.
D notes the following.
– D works directly with customers to understand their advertising needs
before placing adverts.
– D is responsible for ensuring that the advert meets the customer’s needs
after the advert is placed.
– D directs F over which advert to place and when to place it.
– D does not bear inventory risk because there is no minimum purchase
requirement with F.
– D does not have discretion in setting the price because fees are charged
based on F’s scheduled rates.
D considers that it is primarily responsible for fulfilling the promise to provide
advertising services. Although F delivers the placement service, D directly
works with customers to ensure that the services are performed to their
requirements. Although D does not bear inventory risk and does not have
discretion in setting the price, D considers that it controls the advertising
services before they are provided to the customer. Therefore, D concludes that
it acts as a principal.
Example 6 – Entity is a principal for consulting services provided

by a subcontractor
Investment Management Company P is the fund manager of Fund F.

P engages Advisory Company S to provide it with consulting services in
implementing F’s investment management policy.
P notes that:
– it independently selected S to help it with fulfilling its obligations under its
contract with F;
– it entered into a contract with F before selecting and engaging S;
– it is the counterparty to the consulting services contract, rather than F; and
– it has a contractual right to direct how S provides the services and also to
suspend S’s services.
P concludes that these factors indicate that it is using S as a subcontractor and

that it is a principal directing S to provide services on its behalf. In reaching this
decision, P also considers the indicators of control provided by the standard.
– P is considered by F as the company with the primary responsibility for
fulfilling the investment management services contract and the entity
responsible for the acceptability of those services.
– P determined the price of the investment management services before it
signed a contract with S.
Example 7 – Entity is a principal even though it does not take

physical possession of goods
Carmaker M contracts with Supplier S to manufacture the bumper for its vehicle
model. M owns the intellectual property (IP) rights for that bumper technology,
which is specifically designed to fit its vehicles. Further, M owns the machinery,
equipment and moulds used by S to produce the bumpers at S’s facilities. S
may not use that machinery, equipment or moulds to produce bumpers for any
other entities besides M. S only produces bumpers based on M’s orders. M
uses the same bumpers from S in its own production facilities and for after-
market sales.
Body Shop B orders a new bumper directly from M for an existing vehicle
(e.g. for a repair). M then submits a purchase order to S and instructs S to ship
the new bumper directly to B. S makes the bumper and ships it to B and then
invoices M.
In evaluating whether it is the principal for the sale of the bumper to B, M
evaluates whether it controls the bumper before it is transferred to B. Even
though the bumper is shipped directly to B from S, M concludes that it controls
the bumper before it is transferred to B and therefore that it is the principal.
M’s conclusion that it controls the bumper is based on the following factors.
– M has the ability to direct the use of the bumper. M owns and controls
the use of the IP and the equipment used to manufacture the bumper; no
bumpers are produced other than from M’s orders. M decides whether to
direct a particular unit to its own facilities (e.g. to install in a new vehicle) or to
another customer (e.g. a different repair shop or auto parts retailer). S cannot
sell the bumper to a customer not permitted by M or use it at its discretion
(because S does not manufacture cars); it can only direct the bumper as
instructed by M.
– M has the ability to obtain substantially all of the remaining benefits from
the bumper. M is entitled to all of the proceeds (the amount of which it
determines) from the sale of the bumper to B or it could use the bumper to
produce a new vehicle. As a result, M is able to obtain substantially all of the
remaining benefits from each bumper.
M does not need to consider the principal-agent indicators because it is apparent
based on applying the general control requirements that M controls the bumper
before it is transferred to B and therefore is the principal in the transaction.
Example 8 – Entity is an agent when goods and services delivered

directly to customer by third parties
Company X markets itself as a leading provider of end-to-end IT security

solutions. X aims to operate as a specialist extension of its customers by having
its experts match the customers’ needs to available solutions.
X helps a customer evaluate available technologies and determine which
combination of technology solutions will best meet its specific needs. This
assistance generally leads to the purchase of an enterprise-wide solution by the
customer. The products typically consist of hardware and software licences, as
well as related support, maintenance and training.
X has concluded that each hardware product and each software licence is
typically a specified good.
Hardware
X does not maintain an inventory of hardware; all hardware purchased by X’s
customers is delivered directly to the customer by one of X’s vendor partners.
X’s terms with its vendor partners typically mirror its terms with its customers.
For example, title typically transfers to X at the same time as it transfers to
the customer (typically, at the vendor partner’s location), and return rights
from the customer to X are typically mirrored by the return terms from X to its
vendor partner.
In addition to the above terms, X considers the following facts when
determining whether it is a principal or agent in the arrangement.
– X sets the price of the hardware to the customer, but its discretion to set
that price is effectively constrained by market pressures – i.e. it cannot price
goods too expensively because X’s customers generally have alternative
supply options.
– Any vendor warranties and end-user agreements or documentation are
between the third party vendor and the customer – X is not a party thereto.
Therefore, the third party vendors are clearly not invisible to the customer.
– X frequently serves as a contact point for its customers, but does not
maintain a call centre or helpdesk. When customers contact it, X generally
just facilitates the customer’s contact with the appropriate personnel from
the third party vendor.
– X generally does not accept returns from customers that will not be accepted
by the third party vendor.
X concludes that it is an agent for sales of hardware. Important to X’s conclusion
is that at no point before control is transferred to the customer can X direct a
specified unit of hardware to anyone or prevent the third party vendor from
directing (e.g. selling, giving or leasing) it to any other customer the vendor
chooses. X has no rights to any hardware units before a customer places
an order with X and X, in turn, places an order with the third party vendor. In
addition, X does not maintain any hardware inventory of its own, has no pre-
customer order purchase commitments with the third party vendors and does
not have any arrangements with its vendor partners for them to hold units for X.
Moreover, X concludes that its vendor partners do not perform on X’s behalf in
these arrangements. Although X establishes the price of the hardware with its
customers, the weight of relevant evidence supports a conclusion that the third
party vendors are not acting on X’s behalf. X notes that:
– the third party vendors have primary responsibility for fulfilment. They pick
and are responsible for shipping the requested hardware;
– the warranties and end-user agreements generally ensure that the third party
vendors are known to the customer and establish their responsibility for the
acceptability of the hardware; and
– X has no return or other back-end inventory risk. Even though X’s customers
will frequently initiate and send returns to X, substantially all of X’s return
terms with its customers are mirrored in the contracts between X and its
vendor partners.
Third party software licences

X similarly concludes that it does not control the third party software licences
before they are transferred to its customers and therefore that it is an agent for
those specified licences.
X’s conclusion is based on the following factors.
– X does not have a pre-purchased pool of licences that it can resell.
– X does not obtain a master copy of the licensed software and cannot
generate or grant licences or keys for a customer independently of the third
party software vendor. It is the third party software vendor that transfers a
copy of the software to the customer, provides the key necessary to register
the licence directly to the customer and enters into an end-user licence
agreement with the customer that grants the licence to the customer.
X further concludes that the software licences in its contracts do not exist
until customers issue a purchase order and execute the applicable end-user
licence agreement with the third party software vendor. Therefore, X concludes
that it does not control the software licences before they are transferred to
its customers.
Example 9 – Entity is a principal in website sales
Company Y operates a website on which it advertises and showcases for sale

a wide variety of consumer products. For a significant portion of its sales,
customers’ orders placed with Y are shipped directly from the supplier to the
customer. Y does not take title to or possess any inventory of these consumer
products at any point.
When a customer places an order, Y notifies the vendor and provides it with
the appropriate customer shipping information – i.e. where to deliver the
product. Y charges the customer the advertised price of the product (which Y
established) and then pays the vendor the specified unit price under the vendor
partner agreement.
At least a few days before products are offered for sale on Y’s website, Y issues
a purchase order to the vendor that ‘reserves’ a specified number of units, at
a fixed price, that reflects its estimate of the number of units that it expects to
sell to customers. The purchase orders are cancellable, meaning that Y does not
have inventory risk – i.e. if it cannot sell the goods to its customers, then Y can
cancel the purchase order without recourse or penalty.
Despite the purchase orders being cancellable by Y, Y concludes that they
convey control over the specified products in these arrangements before the
products are transferred to customers. Therefore, Y is acting as principal.
Y’s conclusion is based on the following regarding the purchase orders.
– Before Y’s customers buy one of the specified products, the vendor cannot
direct the use of the reserved units subject to the purchase order to another
customer (or for its own use) and cannot obtain substantially all of its
remaining benefits. Specifically, the vendor cannot obtain the remaining
benefits in terms of cash flows from sale because the vendor cannot sell the
product to another party while it is being held for Y. Also, the vendor cannot
realise any beneficial change in value during the hold period because the
price to Y for the products is defined in the purchase order.
– From the time Y issues the purchase order until it either sells the product to
one of its customers or cancels the purchase order (i.e. releasing the hold),
Y has the sole ability to direct the product to one of its customers and obtain
substantially all of its remaining benefits, including by adjusting the price that
it charges for the product on the website.
The control evaluation is further supported by the fact that Y’s reserved unit
count ’depletes’ as it completes sales to customers. Each unit sold and shipped
to a Y customer is a unit that Y (1) controlled before it was transferred to the
customer and (2) directed the vendor to pick and ship at Y’s direction.
Based on its evaluation, Y concludes that it has the ability to direct the use of
and obtain substantially all of the remaining benefits from the products (and can
prevent others from doing so). Therefore, Y concludes that it is the principal in its
arrangements with the vendor. Y notes that the principal-agent indicators do not
provide any disconfirming evidence to this conclusion because these indicators
are mixed. Specifically, Y controls the price to the customer but it does not have
inventory risk with respect to the products and it shares responsibility with the
vendor for fulfilment to the customer.
Example 10 – Entity is an agent in providing a service
ABC Corp contracts with consumer products companies and content

developers to create video content (published on the internet) that promotes
products sold by the consumer products companies.
ABC enters into a contract with Customer D (a consumer products company)
to provide the services of Provider P (a content developer) to create videos
that promote the use of D’s products. The contract with D specifies that ABC is
entering into the agreement on behalf of P (identified in the contract).
ABC is not involved in developing the specifications for what P will produce.
ABC is not responsible if D is unsatisfied with P’s end product. D has no
recourse against ABC, unless ABC has not satisfied its obligations in the
contract – generally limited to the responsibility for co-ordination between the
content developer and the consumer products company.
ABC has contracts with multiple content developers, including P, to create
video content. ABC separately negotiates a fee with each content developer
for creating the content. ABC and D set the price for the content development
and P does not have visibility into that price. However, D must pay P for costs
incurred plus a reasonable margin if it terminates the contract for reasons other
than P’s failure to perform.
ABC concludes that there is only a single specified service in this contract,
which is the service to produce the video content that promotes D’s consumer
products. ABC considered the following in evaluating whether it controls the
specified service.
1. Is the service combined with other goods or services into a combined
output that is the specified good or service?
No. There are no other promised goods or services in the contract.
2. Does ABC direct P to provide services on its behalf?
No. ABC did not first enter into a contract with D and then engage P. D
and ABC entered into a contract that specified P’s involvement, so P
was engaged concurrently with ABC and D concluding their contract.
Furthermore, ABC does not control the services because it does not define
the services to be performed by P and is not involved with the fulfilment of
the product.
3. Does ABC control a right to the specified service before it is provided to D?
No. ABC did not obtain the rights to the content, the content itself or commit
to purchasing the finished content before entering into the contract with D.
Therefore, ABC cannot direct the use of or benefit from P’s finished content
because it cannot use, resell or consume the content on its own.
Furthermore, ABC cannot benefit from the service in the contract for its own
purposes.
ABC observes that its agent conclusion is further supported by the control
indicators.
– Primary responsibility for fulfilment: P is primarily responsible for providing
the content to D. ABC is only responsible for co-ordinating between P and D.
– Price discretion: ABC sets the price and contract with D and P. However, this
does not change the conclusion based on the other evidence provided.
– Inventory risk: ABC does not have inventory risk, which supports a conclusion
that it does not obtain control of the content before it is transferred to D.
Based on the above, ABC concludes that it is the agent for the specified service
and recognises revenue on a net basis.
Example 11 – Specified good or service is an input into a combined

output
ABC Corp partners with third parties that own and operate web-based
platforms. ABC creates IT environments for its customers on these platforms,
secures the platform processing capacity for its customers and provides
software to monitor and manage the cloud consumption on the platforms.
ABC is an authorised reseller of three different cloud platforms and provides
customer support on each cloud platform to ensure that customer applications
have maximum up-time (i.e. are always available on the cloud).
ABC enters into a contract with Customer D to implement a cloud-based
solution and provide cloud capacity management. The services under the
contract include identification and procurement of cloud computing capacity, a
software interface to help customers monitor their cloud computing use, and
customer support and maintenance. D selects Platform Provider P’s product
to be used in the services. However, D and P do not enter into a contractual
relationship and ABC accepts responsibility for the cloud platform.
ABC sets the price charged to D for the services and P is not involved in the
negotiations and does not have visibility into the contract. However, given
market competition for the cloud platform and rates at which P sells separately,
ABC is practically limited in the amount that it can charge D for the platform.
ABC’s separate contract with P requires it to pay P even if D does not pay
ABC for the services. ABC also prepays for reserved instances on the various
provider platforms that it will resell to its customers. ABC does this to ensure
that services are able to be provided uninterrupted.
ABC concludes that it is providing a single specified service to D because it is
performing a significant service of integrating the platform, software, support
and maintenance into a single performance obligation.
The specified cloud services are a single, integrated offering and ABC provides
the significant service to D of integrating all items, including the third party
cloud platform, into the combined output (i.e. the integrated cloud services) for
which D contracted. The third party web platform is merely one input into ABC’s
integrated cloud offering, which ABC controls and makes use of in fulfilling the
specified service. That the third party cloud platform is an input into a single,
integrated offering provided by ABC is determinative. ABC controls that cloud
platform service along with all of the other inputs into the specified service (i.e.
the single, integrated cloud offering). No further analysis is performed.
10.3.3 Recognition
IFRS 15.B35B If the entity is a principal, then it recognises revenue and the related costs on a
gross basis – corresponding to the consideration to which the entity expects to
be entitled.
IFRS 15.B36 If the entity acts as an agent, then its performance obligation is to arrange for the
provision of the specified goods or service. Therefore, it recognises revenue on a
net basis corresponding to any fee or commission to which the entity expects to
be entitled. An entity recognises revenue when its obligation to arrange for the
provision of the specified good or service is fulfilled, which may be before it is
provided to the customer by the principal.
IFRS 15.47, B35B–B36 Amounts collected by an agent on behalf of a third party are accounted for as a
payable in the statement of financial position until they are settled and do not gross
up revenue and expenses. Similarly, amounts prepaid by an agent to a third party on
behalf of customers are recognised as a receivable until they are recovered and do
not gross up revenues and expenses. For discussion of sales taxes, see Chapter 3.
Example 12 – Revenue recognition by a principal
Company S is providing restructuring advice to Customer C and has determined

that it is acting as principal in providing the service to C.
S billed C 100 for the services performed and incurred costs of 50 to deliver the
service, which included costs of 30 paid to external lawyers.
Because S is acting as a principal, it reports revenue and costs, including the

legal fees paid to the external lawyers, on a gross basis. As such, it recognises
revenue of 100 and costs of 50.
Example 13 – Revenue recognition by an agent
Company V operates a website from which it sells Company T’s products.

Customers place orders directly on the website and provide credit card details
for payment. V receives the order and authorisation from the credit card
company and passes the order on to T, which ships the product directly to the
customer. V does not take title to the product and has no risk of loss or other
responsibility for the function or delivery of the product. T is responsible for all
product returns and defects. T sets the price of the product at 175, from which V
receives a commission of 25.
V considers that it does not take title to the product, is not primarily responsible
for providing the product, does not have inventory risk and does not have
discretion in establishing prices. Therefore, V determines that it does not control
the product before it is transferred to the customer and acts as an agent. As a
result, V recognises its fee of 25 as revenue when it passes the order to T.
No specific guidance on allocating a discount when an entity is a

principal for part of the arrangement and an agent for the other
part
The standard does not include specific guidance on how an entity allocates a
discount in an arrangement in which it is a principal for some goods or services
and an agent for others. To achieve the allocation principle in these situations,
judgement will be needed in determining the discount to allocate to the
performance obligation related to acting as an agent in arranging for goods or
services on a customer’s behalf.
For further discussion on allocating the transaction price, including discounts,
see Section 4.2.
Estimating gross revenue as a principal
In some arrangements, the entity may be the principal even though it does not
know the price paid by the end customer to the intermediary that is an agent
because it receives a fixed amount per unit regardless of the price paid. The
standard does not address these fact patterns, but the International Accounting
Standards Board (the Board) provided its views in the basis for conclusions. The
Board noted that an entity that is a principal would generally be expected to be
able to apply judgement and determine the consideration to which it is entitled
using all relevant facts and circumstances that are available to it.
IFRS 15.BC385X–BC385Z Although a principal may be unaware of the specific amount charged by an
intermediary that is an agent, it may have information that could be used to
estimate the transaction price. An entity that is a principal should carefully
consider the facts and circumstances and available information when
estimating the transaction price.
Example 14 – Estimating gross revenue as a principal: Discount

attributed to the company
Company C is a principal that is entitled to receive 3 from
Intermediary D for each good sold to end customers. D may sell
the good to the end customer for a range of prices from 2 to 5, but
the amount remitted by D to C will be 3 for each good sold to end
customers on C’s behalf.
C does not know and will not know the specific price charged by D to
the end customer. However, it should consider what information is
available in assessing whether it could estimate the transaction price
(e.g. estimated transaction price of 4 resulting in revenue of 4 and
commission expense of 1).
Example 15 – Estimating gross revenue as a principal: Discount

attributed to the intermediary
Company B is a principal that is entitled to receive 80% of the 10
list price for each good sold by Intermediary D to end customers.
Regardless of whether D sells the good for 7, 1 or another amount,
the amount remitted by D will be 8 for each good sold to end
customers on B’s behalf.
B knows the list price, which is the product’s stand-alone selling
price. Therefore, any incremental discount offered to the end
customer by D is attributed to the intermediary. B’s transaction price
for each good is 10.
10.3.4 Transporting goods to customers

IFRS 15.B34, BC116S In some arrangements, an entity delivers goods to a location specified by its
customer and incurs transport costs. To determine how to account for these
costs, an entity needs to consider whether the transportation service is a distinct
performance obligation (see Chapter 2) and when control of the goods transfers to
the customer.
If control of the goods transfers to the customer on delivery to the final destination
– i.e. transport and distribution costs form part of a single performance obligation
for the sale of goods – then the entity recognises revenue when the goods are
delivered and applies the guidance on inventory in the inventories standard on
accounting for transport costs.
If control of the goods transfers to the customer before the goods are transported,
then this may indicate that the transportation service is a separate performance
obligation and the entity needs to determine whether it is a principal or an agent in
relation to it (see 10.3.1).
– If the entity acts as a principal for the transportation service, then it recognises
the gross revenue as the service is provided and applies the guidance in the
revenue standard on fulfilment costs.
– If the entity acts as an agent for the transportation service, then it recognises the
net revenue when the service is arranged.
The following flowchart summarises how an entity may analyse transport costs.
When does control transfer?
Delivery to the
Delivery to the carrier
final destination
PO1: Goods PO2: Service
Principal or agent?
Principal Agent
Revenue: gross as Revenue: net when Single PO satisfied on

service is provided the service is delivery:
Transport costs: arranged Revenue: gross
apply the revenue Transport costs: N/A Transport costs: apply
standard the inventories
standard
Example 16A – Accounting for transportation costs: Entity is a

principal
Retailer B enters into a contract with Customer C that involves the following
two performance obligations:
– transfer of Product P; and
– a delivery service.
Based on its evaluation of whether it controls the goods and services before
transfer to C, B concludes that it is a principal for both performance obligations.
B allocates the total transaction price between the two performance obligations
and recognises revenue and costs for each performance obligation as follows.
10.4 Customer options for additional goods or services |
– Product P: Revenue is recognised when control transfers to C when P leaves

B’s premises. The cost of the inventory as determined under the inventories
standard is derecognised at the same point in time.
– Delivery service: Revenue is recognised over time as the shipping service
is performed. B considers that the shipping costs are not in the scope of
another standard and that they do not generate or enhance a resource
controlled by B that will be used to satisfy a performance obligation in the
future. Therefore, B expenses the shipping costs as they are incurred.
Example 16B – Accounting for transportation costs: Entity is an

agent
Modifying Example 16A, Retailer B instead determines that it acts as an agent

for the shipping service, which is provided by a third party shipping company
(see Section 10.3).
The accounting for Product P is the same as above.
However, when B is an agent for the delivery service, revenue for arranging the
delivery service is recognised on a net basis – i.e. net of the amount payable to
the third party shipping company – when B satisfies its obligation of arranging
for the delivery service.
10.4 Customer options for additional goods or

services
Overview
An entity accounts for a customer option to acquire additional goods or services

as a performance obligation if the option provides the customer with a material
right. The standard provides guidance on calculating the stand-alone selling
price of a customer option when it is a material right.
10.4.1 General requirements

IFRS 15.B40 When an entity grants the customer an option to acquire additional goods or
services, that option is a performance obligation under the contract if it provides
a material right that the customer would not receive without entering into that
contract.
IFRS 15.B40–B41 The following flowchart helps analyse whether a customer option is a performance
obligation.
The entity grants the customer an option

to acquire additional goods or services
Could the customer obtain the

right to acquire the additional goods or
services without entering into the
sale agreement?
No Yes
Does the option give the customer

the right to acquire additional goods
or services at a price that reflects the
stand-alone selling price for those
goods or services?
No Yes
The option may be a material right,

The option does not give rise to
and if so then it gives rise to a
a performance obligation
IFRS 15.B42 If the stand-alone selling price for a customer’s option to acquire additional goods
or services that is a material right is not directly observable, then an entity will need
to estimate it. This estimate reflects the discount that the customer would obtain
when exercising the option, adjusted for:
– any discount that the customer would receive without exercising the option; and
– the likelihood that the option will be exercised.
IFRS 15.B40, B46 Revenue for material rights is recognised when the future goods or services are
transferred or when the option expires. If the option is a single right with a binary
outcome – i.e. it will either be exercised in full or expire unexercised – then there
is nothing to recognise before the option is exercised or expires. Conversely, if the
option represents multiple rights or does not expire, then it appears that an entity
may apply the guidance on unexercised rights – i.e. breakage (see Section 10.5).
Example 1 – Cable television service and additional premium

channels
Cable Company B contracts with Customer D to provide television services for

a fixed monthly fee for 24 months. The base television services package gives
D the right to purchase additional premium channels. In Month 3, D adds a
premium sports channel for an additional 5 per month, which is the price that all
customers pay for the premium sports channel (i.e. it is priced at its stand-alone
selling price).
The premium channel can be added or dropped by D without affecting the base
cable television service. Therefore, the ability to add the premium channel to the
package represents an option to purchase additional goods or services.
At contract inception, B concludes that because the option to purchase the
premium channel is priced at its stand-alone selling price, the option is not a
material right. Therefore, the option is not identified as a performance obligation
at contract inception. B recognises revenue for the premium channel in Month 3
when it provides the services.
Example 2 – Product sold with a discount voucher
IFRS 15.IE250–IE253 Retailer R sells a computer to Customer C for 2,000. As part of this arrangement,
R gives C a voucher. The voucher entitles C to a 25% discount on any purchases
up to 1,000 in R’s store during the next 60 days. R intends to offer a 10% discount
on all sales to other customers during the next 60 days as its seasonal promotion.
R regularly sells this model of computer for 2,000 without the voucher.
R notes that the discount voucher provides a material right that C would not
receive without entering into the original sales transaction. This is because C
receives a 15% incremental discount compared with the discount expected
to be offered to other customers (25% discount voucher - 10% discount for all
customers). Therefore, the discount voucher is a separate performance obligation.
R estimates that there is an 80% likelihood that C will redeem the voucher and
will purchase additional products with an undiscounted price of 500.
R allocates the transaction price between the computer and the voucher on a
relative selling price basis as follows.
Stand-alone
Computer 2,000 97.1% 1,942 (2,000 × 97.1%)

Voucher 60 1
2.9% 58 (2,000 × 2.9%)
Total 2,060 100.0% 2,000
Note
1. Stand-alone selling price for the voucher calculated as 500 estimated purchase of products
× 15% incremental discount × 80% likelihood of exercise.
C purchases 200 of additional products (pre-discount) within 30 days of the

original purchase for 150 cash payment.
C makes no additional purchases before the voucher expires. Therefore, at the
expiry date R recognises the remaining amount allocated to the voucher as
revenue.
R records the following journal entries.
Debit Credit
Cash 2,000
Revenue 1,942
Contract liability 58
To recognise initial sale of computer and voucher
Cash 1501
Revenue 173
To recognise subsequent purchase

Revenue 35
To recognise expiry of voucher
Notes
1. Discounted sale price of additional products purchased: 200 - (200 × 25%).
2. Partial satisfaction of performance obligation 58 × (200 purchases / 500 total expected

purchases).
3. Settlement of performance obligation on expiry (58 - 23).
Determining whether a material right exists requires an

evaluation of both quantitative and qualitative factors
An entity considers whether a customer option for additional goods or

services is a material right at contract inception based on both quantitative and
qualitative factors. Although the evaluation is judgemental, an entity considers
whether the option would be likely to impact the customer’s decision to buy the
entity’s product or service in the future. This is consistent with the notion that an
entity considers valid expectations of the customer when identifying promised
goods or services (see Chapter 2).
Customers’ options that provide accumulating rights are

assessed in aggregate
In many cases, the rights that an entity grants to its customers accumulate as
the customer makes additional purchases. For example, in a customer loyalty
programme the points granted in an initial transaction are typically used in
conjunction with points granted in subsequent transactions. Further, the value
of the points granted in a single transaction may be low, but the combined value
of points granted over an accumulation of transactions may be much higher.
In these cases, the accumulating nature of the right is an essential part of
the arrangement.
When assessing whether these customer options represent a material right, an
entity considers the cumulative value of the rights received in the transaction,
the rights that have accumulated from past transactions and additional rights
expected from future transactions.
An entity considers all relevant quantitative and qualitative factors.
Exercise of a material right
When a customer exercises a material right for additional goods or services, an

entity may account for it using one of the following approaches.
– Continuation of the original contract: Under this approach, an entity treats
the consideration allocated to the material right as an addition to the
consideration for the goods or services under the contract option – i.e. as a
change in the transaction price.
For example, Service Provider S enters into a contract with Customer M to
provide Service D for two years for 100 and an option to purchase Service E
for two years for 300, which is typically priced at 400. S determines that the
option is a material right and therefore a separate performance obligation.
Assume that S initially allocates the transaction price of 100 as follows: 75
to D and 25 to the option to purchase E. Six months into the contract, M
exercises the option to purchase E.
On exercise of the option, S recognises revenue of 325 (25 + 300) for E
over two years. There are no changes to the amount or timing of revenue
recognition for D – i.e. 75 continues to be recognised over two years from
contract inception.
– Contract modification: Under this approach, an entity applies the contract
modification guidance to evaluate whether the goods or services transferred
on exercise of the option are distinct from the other goods or services in
the contract. The outcome of this evaluation will determine whether the
modification is accounted for prospectively or with a cumulative catch-
up adjustment. See Chapter 8 for further guidance on contract modifications.
Estimate of the likelihood of exercise of an option is not revised
IFRS 15.88 When determining the stand-alone selling price of a customer option for
additional goods or services, an entity estimates the likelihood that the
customer will exercise the option. This initial estimate is not subsequently
revised because it is an input into the estimate of the stand-alone selling price
of the option. Under the standard, an entity does not reallocate the transaction
price to reflect changes in stand-alone selling prices after contract inception.
The customer’s decision to exercise the option or allow the option to expire
affects the timing of recognition of the amount allocated to the option, but it
does not result in reallocation of the transaction price.
Estimating the stand-alone selling price of ‘free’ gift cards and

coupons
IFRS 15.42 In some cases, an entity may sell gift cards or coupons in stand-alone
transactions with customers. In addition, the entity may grant gift cards
or coupons in the same denomination in transactions in which customers
purchase other goods and services. In the latter case, the gift cards or coupons
may be identified as conveying a material right to the customer – e.g. an
entity offers a free gift card or coupon with a value of 15 with every 100 of
goods purchased.
In these cases, the stand-alone selling price of the gift card or coupon identified
as a material right may differ from the stand-alone selling price of a separately
sold gift card or coupon. This is because customers who receive the gift card or
coupon as a material right may be significantly less likely to redeem them than
customers who purchase a gift card or coupon in a separate transaction.
Therefore, an entity may conclude that there is no directly observable stand-
alone selling price for a free gift card or coupon provided to a customer in
connection with the purchase of another good or service. In this case, the entity
estimates the stand-alone selling price using the guidance in Step 4 of the
model (see Chapter 4).
Coupons issued at the point of sale
Retail stores often print coupons at the register after a purchase is completed
(sometimes referred to as ‘Catalina coupons’ or ‘bounce-back coupons’ that
can be redeemed for a short period of time). The coupons are handed to
customers at the point of sale or packaged with the goods that customers have
contracted to purchase. Often, customers are not aware that they will receive
these coupons.
Customers can often access similar discounts without making a purchase – e.g.
if coupons are printed in a newspaper or freely available in-store or online. This
type of general marketing offer may indicate that the coupon does not provide a
material right because the discount is available to the customer independently
of a prior purchase. As a result, the coupons are often recognised as a reduction
in revenue on redemption.
Conversely, if there is no general marketing offer then the entity assesses
whether the coupon conveys a material right. This assessment includes
consideration of the likelihood of redemption, which will often be low and
therefore reduces the likelihood that the coupon will be identified as a
material right.
Volume discounts and rebates
Prospective volume discounts (or rebates) that are earned once a customer
has completed a specified volume of optional purchases are evaluated for the
presence of a material right and do not give rise to variable consideration.
To evaluate whether an option represents a material right, an entity evaluates
whether a similar class of customer could receive the discount independently
of a contract with the entity. This analysis involves comparing the discount in the
current transaction with discounts provided to similar customers in transactions
that were not dependent on prior purchases – i.e. discounts not offered through
options embedded in similar contracts with other customers. The fact that
discounts given to similar customers in stand-alone transactions are similar to
the discount offered in the current contract indicates that the customer could
obtain the discount without entering into the current contract.
For example, a prospective rebate arrangement would not give rise to a material
right if the discounted price after the threshold is consistent with the unit price
offered to other customers that are expected to make purchases at or above
the volume target. However, if other customers can receive the discounted
price only through a prospective rebate arrangement then this suggests that
all customers receive future discounts as a result of prior purchases. In these
cases, a prospective rebate arrangement may give rise to a material right.
Evaluating optional purchases at a discount compared with the

original contract
In many cases, an option to purchase additional goods or services at a discount

from the price in the original contract will give rise to a material right. However,
in some scenarios it may be challenging to determine whether the discounted
price gives rise to a material right – e.g. when an entity uses the cost plus a
margin pricing model and the decrease in price relates to a decrease in costs
passed to the customer. In these cases, it appears that an entity should
consider the following indicators to determine whether the discounted price for
the optional purchases reflects the stand-alone selling price for those goods or
services – i.e. whether there is a material right.
Indicators – No material right Indicators – Material right
Decrease in price reflects the Decrease in price is incremental to

expected decrease in costs the expected decrease in costs
Decrease in price is consistent with Decrease in price is incremental to

price decreases for other similar price decreases for other similar
mature goods or services mature goods or services
Discounted price is consistent Discounted price is lower than the

with reduced price offered to price offered to other customers –
other customers, including new i.e. not all customers benefit from
customers – i.e. all current and the decrease in costs
potential customers benefit from the
decrease in costs
The right to the discounted price The right to the discounted price
does not accumulate in a manner accumulates in a manner that
that incentivises the customer to incentivises the customer to make
make future purchases future purchases
A cancellable contract may contain a material right
When a contract is cancellable without significant penalty, a material right may

exist for the cancellable period of the contract. This is because a contract that
can be cancelled without a substantive termination penalty is economically
similar to a contract with a renewal right. For example, a three-year contract that
allows the customer to cancel at the end of each year without a substantive
termination penalty is no different from a one-year contract with two one-year
renewal options. Therefore, an entity considers whether the optional renewal
periods give rise to a material right.
Example 3A – Custom product with learning curve effect: No

material right
Automotive Supplier S enters into a two-year framework agreement with

Carmaker M to manufacture a custom part. M is committed to purchasing
a minimum of 500 parts for 200 per part. Each part is a distinct good that is
transferred at a point in time. If M purchases between 500 and 700 parts,
then the price per part for those parts decreases to 180. For purchases above
700 parts, the price per part decreases to 150.
The decreases in the price per part are consistent with the expected reduction
in S’s costs along its learning curve. The price reductions are also consistent
with S’s typical decrease in price for other mature parts of a similar size and
complexity.
S considers that there is some level of accumulation because M achieves the
discounted price of 150 only if it purchases more than 700 parts. However,
because M is committed to purchasing 500 parts under the contract, S
determines that this indicator is not significant to its analysis.
In the absence of any other quantitative or qualitative factors, S concludes that
the discounted prices on the optional purchases reflect the stand-alone selling
price for those parts and the contract does not include a material right.
Example 3B – Custom product with learning curve effect: Material

right
Modifying Example 3A, the decreases in the price per part are incremental
to the expected reduction in Automotive Supplier S’s costs along its learning
curve. The price reductions are also incremental to S’s typical decrease in price
for other mature parts of a similar size and complexity.
Considering these quantitative and qualitative factors, S concludes that the
discounted prices on the optional purchases do not reflect the stand-alone
selling price for those parts and the contract includes a material right.
Example 4 – Custom production line: No material right
Shipbuilder B enters into a contract with Customer C to manufacture a highly

customised ship. To manufacture this custom ship, B needs to set up a unique
production line, which it plans to run for one year. C commits to purchasing five
ships at a price of 1,000 per ship. C has the option to purchase additional ships
at a price of 500 per ship as long as the order is placed three months before the
end of the one-year period during which the production line will be in place.
B estimates the stand-alone selling price of the ship using an expected cost
plus a margin approach. The decrease in the price per ship after the first five
ships reflects the expected reduction in B’s costs once the production line
is configured.
The pricing of the committed volume of ships reflects B’s expected margin,
including the costs to set up the custom production line. Once the production
line is set up, B’s costs are limited to the incremental costs for that specific
ship. Therefore, the stand-alone selling price estimated using the expected cost
plus a margin approach is lower. Additionally, B considers that the right does
not accumulate because there is a committed volume of ships and any optional
orders have the same discounted price. Therefore, in the absence of any other
quantitative or qualitative factors B concludes that the reduced price for the
optional ship orders represents their stand-alone selling price and there is no
material right.
Example 5 – Prospective volume rebate: Material right
Food Company F enters into an arrangement with Customer C to supply

Product A. The arrangement includes a fixed price of 1 per unit and an annual
rebate. The rebate is paid only for purchases in excess of 501 units. The
arrangement includes no minimum purchase quantities but F expects that C will
purchase approximately 1,000 units annually.
Purchases Rebate
0–500 -
501+ 0.10
C makes an initial purchase of 100 units. Because the rebate arrangement is

prospective, F evaluates whether the sale gives rise to a material right that
needs to be accounted for as a separate performance obligation.
F determines that the arrangement contains a material right. Therefore, F
recognises revenue for the initial purchase net of the amount of consideration
allocated to the material right liability. F recognises revenue allocated to the
material right when the right is exercised in the future – i.e. C purchases in
excess of 501 units.
Alternatively, if it is considered that all of the goods to be delivered are
substantially the same, then under the alternative approach F may elect to
recognise revenue at the average price per unit based on total expected
purchases, rather than calculating the value of the material right – i.e. at 0.95 per
unit (500 × 1 + 500 × (1 - 0.10)) / 1,000.
Example 6 – Prospective discounts: No material right vs material

right
Scenario 1 – Prospective discounts do not provide a material right

Automotive Supplier X produces standard, non-customised parts that are used
by various carmakers. X enters into a two-year framework agreement with
Carmaker M, a new customer, to manufacture parts for 200 per part. Each part
is a distinct good that is transferred at a point in time.
M is committed to purchasing a minimum quantity of 500 parts per year. If M
purchases more than 1,000 parts, then the price of future purchase orders is
decreased prospectively to 150 per part.
X prices parts of a similar size and complexity consistently, based on expected
annual sales volumes to a specific carmaker:
– carmakers expected to order fewer than 1,000 parts usually pay 200 per part;
and
– carmakers expected to order more than 1,000 parts in total usually pay
150 per part for all purchases. That is, prices usually do not decrease
prospectively as those carmakers purchase additional volumes.
X notes that other carmakers could order similar volumes of parts of similar size
and complexity for a price of 150 without a similar prospective price reduction.
Therefore, in the absence of any other quantitative or qualitative factors
indicating otherwise, X concludes that the pricing on future purchases does not
provide M with a material right.
Scenario 2 – Prospective discounts provide a material right

Modifying Scenario 1, X provides the same prospective price reductions to all
carmakers similar to M – i.e. no carmaker can buy parts for 150 per part before
buying more than 1,000 parts.
In evaluating whether the price reduction provides M with a material right, X
notes that:
– it is not appropriate to compare the pricing with price reductions provided to
other carmakers because they all receive future discounts as a result of prior
purchases; and
– the right for reduced prices accumulates and incentivises M to make
future purchases. This is a qualitative indicator that M pays for the option to
purchase future parts at a discount on its previous purchases.
Therefore, in the absence of any other quantitative or qualitative factors

indicating otherwise, X concludes that the prospective price reduction conveys
a material right to M.
M places an order for 500 parts in the first year. X expects that M will purchase
1,200 parts in total – i.e. it will receive a discount on 200 parts. This is based
on X’s historical experience with framework agreements with similar payment
mechanisms.
X concludes that M has, in substance, paid for 50% of the right for future
discounted parts because M purchased 500 of the 1,000 parts required for it to
be entitled to a price reduction.
X allocates the transaction price between the parts ordered and the material
right for a future discount on a relative selling price basis as follows.
Stand-alone
Parts1 100,0002 95.2% 95,238 (100,000 × 95.2%)

Material right 5,000 3
4.8% 4,762 (100,000 × 4.8%)
Total 105,000 100.0% 100,000
Notes
1. Each part is a separate performance obligation but for simplicity they are presented as a
single item in this table.
2. 500 parts × 200.
3. The stand-alone selling price for the material right is calculated as the expected volume of
parts to be sold at a discount (200) × the discount of 50 (200 - 150) × 50% of the quantity
required to receive future discounts (500 / 1,000).
Example 7 – Periodic price decreases in a framework agreement:

No material right
Automotive Supplier Y enters into a three-year framework agreement with

Carmaker T to supply highly complex parts. Each part is a distinct good that is
transferred at a point in time.
Under the framework agreement, T is not obliged to purchase a minimum
quantity of parts. The price per part set out in the framework agreement
declines each year as follows, independently of the quantity of parts purchased.
– Year 1: 700 per part.
This declining unit price reflects the expected reduction in Y’s learning curve
costs.
Shortly after the framework agreement is signed, T orders 50 parts. Y notes that:
– price reductions are dependent only on the passage of time and not on
previous purchase orders. Therefore, the purchase order does not provide T
with a material right; and
– the purchase order fixes the price for the parts to be delivered. Therefore, the
consideration in the contract is not variable.
When T submits subsequent purchase orders, Y assess whether they should
be combined with the first one (see Chapter 1) and whether the contract
modification guidance should be applied (see Chapter 8).
10.4.2 Practical alternative for similar goods or services

IFRS 15.B43 If the goods or services that the customer has a material right to acquire are similar
to the original goods or services in the contract – e.g. when the customer has an
option to renew the contract – then an entity may allocate the transaction price to
the optional goods or services with reference to the goods or services expected to
be provided and the corresponding consideration expected to be received.
Example 8 – Applying the practical alternative
Company B enters into a contract with Customer C to transfer two units of

Product P for 2,000 (1,000 per unit, which is the stand-alone selling price)
with an option to purchase up to two more units of P at 500 per unit (i.e. 50%
discount). B concludes that each unit of P is distinct and satisfied at a point
in time.
B concludes that the option for up to two additional units of P is a material right
because the discount is incremental to discounts provided to other customers
in this class of customers and does not exist independently from the current
contract. B also concludes that the stand-alone selling price for the two
additional units of P is 1,000.
The options allow C to acquire additional units of P, which are the same as the
goods purchased in the original contract, and the purchases would be made
in accordance with the original terms of the contract; therefore, B uses the
alternative approach to allocate the transaction price to the options.
B expects that there is a high likelihood of the customer exercising each option
because of the significant discount provided. As such, B does not expect
breakage and includes all of the options in the expected number of goods that it
expects to provide. Therefore, B allocates the expected transaction price to the
units expected to be transferred.
Expected transaction 3,000 2,000 (price of original 2 units

price purchased) + 500 (price of third unit)
+ 500 (price of fourth unit)
Number of units 4 2 original units purchased + option for
expected to be 1 unit + option for 1 unit
transferred
Price allocated to each 750 3,000 / 4 units
unit
Therefore, in effect 1,500 of the total consideration in the original contract of

2,000 is allocated to the purchase of the original two units and the remaining
500 is allocated to the two options.
Alternative approach not limited to renewal options
IFRS 15.B43 We believe that the alternative approach is not limited to contract renewals (e.g.
a right to renew a service contract on the same terms for an additional period).
It may also be applied to other types of material rights – e.g. options to purchase
additional goods or services at a discounted price when the optional goods or
services are similar to those offered in the contract.
For example, we believe that an entity could apply the alternative approach to
a prospective volume rebate arrangement. Under the alternative approach, the
entity would allocate the transaction price with reference to the total number
of goods that it expects the customer to purchase under the agreement and
the corresponding expected total consideration from those purchases – i.e.
revenue would be recognised at the average price per unit based on total
expected purchases.
More than one acceptable approach to determine the expected

goods or services to be provided
The standard does not provide detailed guidance on how to determine the
amount of expected goods or services to be provided. The following are
acceptable approaches to determining this amount.
– Contract-by-contract basis: Under this approach, an entity considers each
option that provides the customer with a material right to be a ‘good or
service that is expected to be provided’ unless it expects the customer’s
right to expire unexercised. For example, if an entity includes a renewal
option with a contract price of 100 and a 60 percent probability of being
exercised, then the entity includes 100 in the hypothetical transaction
price rather than 60. This is because 100 is the ‘corresponding expected
consideration’ for the additional good or service. The entity would then
allocate the hypothetical transaction price (which includes 100) to all of the
expected goods or services, including the renewal option on a relative stand-
alone selling price basis.
– Portfolio approach: Under this approach, an entity estimates the number
of goods or services expected to be provided based on historical data for a
portfolio of similar transactions. For example, an entity enters into 100 similar
annual contracts with two optional renewal periods around the same time.
The entity estimates the number of expected renewals for the portfolio to
estimate the transaction price and allocate consideration to the initial and
renewal contracts.
Under both approaches, if the actual number of options exercised is different
from what the entity expected, then the entity updates the transaction price
and revenue recognised accordingly. We believe that it is acceptable to adjust
the number of expected goods or services during the period(s) for which a
material right exists, on either a cumulative catch-up or prospective basis, as
long as the entity establishes a policy for the approach that it uses and applies
it consistently.
Example 9A – Applying the practical alternative: Contract-by-

contract basis
ABC Corp enters into 100 contracts to provide equipment for 10,000 and one
year of maintenance for 2,000 – both prices are equal to their stand-alone
selling price. Each contract provides the customer with the option to renew the
maintenance for two additional years for 1,000 per year.
ABC concludes that:
– the equipment and maintenance are separate performance obligations; and
– each renewal option provides a material right that the customer would not
receive without entering into the contract because the discount is significant
compared with what ABC charges other similar customers.
ABC does not expect the rights to go unexercised. Although it has experience
with similar customers and has data that suggests there will be some breakage,
historical evidence suggests that on a customer-by-customer basis neither
of the options will expire unexercised. ABC therefore allocates the expected
transaction price to the renewal options expected to be exercised.
Stand-
Expected alone Selling
Performance Contract consider- selling price Price
obligation price ation price ratio allocation
Equipment 10,000 10,000 10,000 62.5% 8,750

Maintenance
Year 1 2,000 2,000 2,000 12.5% 1,750
Renewal
option 1 1,000 1,000 2,000 12.5% 1,750
Renewal
option 2 1,000 1,000 2,000 12.5% 1,750
Total 14,000 14,000 16,000 100.0% 14,000
In Year 1, ABC recognises 8,750 when it transfers control of the equipment to

the customer and 1,750 as it satisfies the related maintenance performance
obligation. The difference between the amount recognised as revenue and
consideration received of 1,500 (12,000 - 8,750 - 1,750) is recognised as
a contract liability. The amounts allocated to the renewal options will be
recognised as the performance obligations are satisfied.
If the customer does not exercise its options, then ABC recognises as revenue
the amounts allocated to all remaining options.
Example 9B – Applying the practical alternative: Portfolio approach
Modifying Example 9A, ABC Corp estimates the total number of expected
goods or services for the 100 contracts based on expectations for similar
customers. It estimates the number of renewals and corresponding expected
transaction price. It also concludes that the stand-alone selling price for each
maintenance period is the same.
Based on its expectations, it allocates the transaction price to each performance

obligation as follows.
Stand-
Expected alone Selling
Performance Contract Expected consider- selling price Price
obligation price renewals ation price ratio allocation
Equipment 10,000 N/A 10,000 10,000 65.0% 8,911
Maintenance
Year 1 2,000 N/A 2,000 2,000 13.0% 1,782
Renewal
option 1 1,000 90% 900 1,8001 11.5% 1,577
Renewal
option 2 1,000 81% 810 1,6202 10.5% 1,440
Total 14,000 13,710 15,420 100.0% 13,710
Notes
1. 2,000 × 90%.
2. 2,000 × 81%.
In Year 1, ABC recognises 891,100 (8,911 × 100) when it transfers control of the
equipment to the customer and 178,200 (1,782 × 100) as it satisfies the related
maintenance performance obligation. The difference between the amount
recognised as revenue and consideration received of 130,700 (1,200,000 -
891,100 - 178,200) is recognised as a contract liability. The amounts allocated
to the renewal options will be recognised as the performance obligations
are satisfied.
If the actual number of renewals is different from what was expected, then
ABC’s policy is to update the transaction price and recognise revenue with a
cumulative catch-up adjustment.
10.4.3 Customer loyalty programmes

Applying the option guidance to customer loyalty programmes
IFRS 15.B40 Customer loyalty programmes are often in the scope of the customer option
guidance and the requirements discussed in 10.4.1 apply. A customer loyalty
programme that provides a customer with a material right is accounted for as a
separate performance obligation.
Under some loyalty programmes, points expire, whereas under others they do not.
It appears that an entity may apply the breakage guidance (see Section 10.5) to both
types of programme to determine when to recognise revenue for points that are
not expected to be exercised. This is because the points represent multiple material
rights rather than a single right with a binary outcome.
Example 10A – Customer loyalty points programme: Increase in

estimated redemptions
IFRS 15.IE267–IE270 Retailer C offers a customer loyalty programme at its store. Under the
programme, for every 10 that customers spend on goods they are rewarded
with one point. Each point is redeemable for a cash discount of 1 on future
purchases. C expects 97% of customers’ points to be redeemed. This estimate
is based on C’s historical experience, which is assessed as being predictive
of the amount of consideration to which it will be entitled. During Year 1,
customers purchase products for 100,000 and earn 10,000 points. The stand-
alone selling price of the products to customers without points is 100,000.
The customer loyalty programme provides the customers with a material right,
because the customers would not receive the discount on future purchases
without making the original purchase. Additionally, the price that they will pay on
exercise of the points on future purchases is not the stand-alone selling price of
those items.
Because the points provide a material right to the customers, C concludes that
the points are a performance obligation in each sales contract – i.e. the customers
paid for the points when purchasing products. C determines the stand-alone
selling price of the loyalty points based on the likelihood of redemption.
C allocates the transaction price between the products and the points on a
relative selling price basis as follows.
Stand-alone
Products 100,0001 91% 91,000 (100,000 × 91%)

Points 9,700 2
9% 9,000 (100,000 × 9%)
Total 109,700 100% 100,000
Notes
1. Stand-alone selling price for the products.
2. Stand-alone selling price for the points (10,000 × 1 × 97%).
During Year 2, 4,500 of the points are redeemed and C continues to expect

that 9,700 points will be redeemed in total. C calculates the revenue to be
recognised and the corresponding reduction in the contract liability as follows.
4,175 = 9,000 × 4,500 / 9,700 – i.e. price allocated to points multiplied by points
redeemed in Year 2 divided by total points expected to be redeemed.
During Year 3, a further 4,000 points are redeemed. C updates its estimate,

because it now expects 9,900 rather than 9,700 points to be redeemed. C
calculates the revenue to be recognised and the corresponding reduction in the
contract liability as follows.
3,552 = (9,000 × (4,500 + 4,000) / 9,900) - 4,175 – i.e. price allocated to points
multiplied by points redeemed in Year 2 and Year 3 divided by total points
expected to be redeemed minus revenue recognised in Year 2.
Example 10B – Customer loyalty points programme: Decrease in

estimated redemptions
Modifying Example 10A, assume that during Year 3 Retailer C updates its
estimate and now expects 9,200 rather than 9,700 points to be redeemed. C
calculates revenue to be recognised and the corresponding reduction in the
contract liability as follows.
4,140 = (9,000 × (4,500 + 4,000) / 9,200) - 4,175 – i.e. price allocated to points
multiplied by points redeemed in Year 2 and Year 3 divided by total points
expected to be redeemed minus revenue recognised in Year 2.
Example 11 – Airline customer loyalty points programme
Airline B offers the following customer loyalty programme.

– Programme members earn one point for every 10 that they spend with B.
– Each point is redeemable for future goods and services with a value of 1: e.g.
flights or consumer goods.
– Loyalty points expire after 24 months if a programme member is inactive: i.e.
if there is no increase or decrease in the member’s loyalty point balance.
– B estimates the redemption rate of loyalty points at each reporting date
based on its historical experience, which is assessed as being predictive of
the amount of consideration to which B will be entitled. B’s current estimate
is that 90% of loyalty points will be redeemed.
B sells Customer C a ticket to fly from Singapore to Hong Kong for 1,000. C is a
member of B’s customer loyalty programme.
The customer loyalty programme provides C with a material right because C
would not receive the discount on future purchases by redeeming the points
without buying the original air travel. Additionally, the price that C will pay on
exercise of the points on its future purchases is not the stand-alone selling price
of those items.
Because the points provide a material right to C, B concludes that the points
are a performance obligation – i.e. C paid for the points when purchasing the
air ticket. In determining the stand-alone selling price of the loyalty points, B
considers the likelihood of redemption.
B allocates the transaction price between the air ticket and the points on a
relative stand-alone selling price basis as follows.
Stand-alone
Air ticket 1,0001 91.7% 917 (1,000 × 91.7%)

Points 90 2
8.3% 83 (1,000 × 8.3%)
Total 1,090 100.0% 1,000
Notes
1. Stand-alone selling price for the air ticket.
2. Stand-alone selling price for the points (1,000 / 10 × 90%).
B recognises revenue for the air ticket of 917 on the flight date and revenue of
83 for the points in proportion to the pattern of rights exercised by C.
B expects 90 points to be redeemed and recognises 0.92 (83 / 90 points) on
each point when it is redeemed.
No significant financing component in most customer loyalty

programmes
IFRS 15.62, BC233 Customer loyalty programmes generally do not include a significant financing
component even though the time period between when the customer loyalty
points are earned and redeemed may be greater than one year. This is because
the transfer of the related goods or services to the customer – i.e. use of the
loyalty points – occurs at the discretion of the customer.
Cancellable customer loyalty programmes may be implicit

Many customer loyalty programmes can be cancelled or changed by the issuer

at any time. However, if the entity has a past practice that creates a valid
expectation for its customers that it will fulfil its promises under the loyalty
programme, then it accounts for the customer loyalty programme as a separate
performance obligation. That is, the entity has made an implicit promise to
operate the customer loyalty programme.
Treatment of customer credit card arrangements
Credit card arrangements often include loyalty programmes that earn card
holders certain benefits based on the use of their credit card.
These arrangements require careful analysis to determine the appropriate
accounting.
When all or part of a credit card arrangement is in the scope of the standard,
the bank determines whether the loyalty programme gives rise to a separate
performance obligation and what the nature of that performance obligation
is. Customer loyalty programmes that give the customer accumulated rights,
which can be used to purchase goods or services in the future at discounted
prices, are generally accounted for as material rights under the standard. Under
this approach, a portion of the consideration received for a transaction that
earns the card holder these rights is deferred and recognised when the rights
are exercised.
The challenge when accounting for these arrangements is identifying the

revenue transaction that gives rise to the rights and, therefore, the transaction
for which the bank defers a portion of the revenue. Entities may need to
consider any annual card fees and also any interchange fees received when the
customer enters into a transaction with a retailer that earns them their rights.
The basis for potentially deferring a portion of interchange fees is that the entity
may consider that, in substance, the interchange fee is paid by the customer.
The other entities in the transaction remit the interchange fee to the bank and,
therefore, are acting only as agents for the bank in the transaction.
When the arrangement is considered outside the scope of the standard,
entities treat the costs of operating these programmes as a marketing expense
and provide for any liabilities arising from the arrangements in accordance with
the provisions standard.
Residual approach generally not appropriate for determining

stand-alone selling price of loyalty points
Generally, the residual approach will not be available for determining the stand-
alone selling price of loyalty points because this approach is available only in
limited circumstances – i.e. when the stand-alone selling price is highly variable
and uncertain. See Section 4.1 for further discussion on determining stand-
alone selling prices.
Awards supplied by a third party

IFRS 15.BC383–BC385 Some customer loyalty programmes may involve multiple parties. If another party
is involved in the customer loyalty programme, then an entity needs to assess
whether it acts as an agent or as a principal with respect to the loyalty points and,
if relevant, the goods or services to be delivered in exchange for the points (see
Section 10.3).
Loyalty programmes may be structured in different ways. Typical arrangements
include the following.
– Points are issued by the entity and can be redeemed only for goods or services
provided by the entity: In these arrangements, the entity is usually a principal
with respect to the loyalty points and the goods or services to be delivered in
exchange for the points because it does not satisfy its performance obligation
until the goods or services are transferred to the customer.
– Points are issued by the entity and can be redeemed for goods or services
provided by the entity or by a third party at the customer’s discretion: In these
arrangements, the entity is usually a principal with respect to the loyalty points
because it is obliged to ‘stand ready’ until the customer has made its choice. The
entity satisfies its performance obligation and recognises revenue only when the
customer redeems the points, either from the entity or from the third party. An
entity assesses whether it acts as an agent or as a principal with respect to the
goods or services to be delivered in exchange for the points.
– Points can be redeemed for goods or services provided only by a third party:
In these arrangements, the entity assesses whether it acts as an agent or as
a principal with respect to the points (i.e. does it control the points before they
are transferred to the customer?). In some cases, this assessment may be
challenging. For example, a bank may offer its credit card customers a loyalty
programme under which the customers earn points to be redeemed with a
specific airline. Judgement is required to determine whether the bank controls
the points before they are transferred to customers (see Section 10.3). Under this
type of arrangement, the entity typically satisfies its obligation when the points
are transferred to the customer.
IFRS 15.B36, BC383–BC385 If the entity acts as an agent, then the net amount retained is recognised as revenue
– i.e. the difference between the revenue allocated to the points and the amount
that the entity pays to the third party.
Example 12A – Third party customer loyalty programme (1)
Company L participates in a customer loyalty programme operated by a third

party. Under the programme, members earn points for purchases made in L’s
stores. Programme members redeem the accumulated award points for goods
supplied by the third party. At the end of 2018, L has granted points with an
allocated transaction price of 1,000 and owes the third party 700. The amount of
revenue to be recognised depends on whether L acts as an agent or a principal
with respect to the points.
L is an agent
If L is acting as an agent with respect to the points, then it recognises revenue
of 300 in relation to the award points when its products are sold to customers
and L has satisfied its obligation to arrange for the points to be provided to the
customer. L records the following entry.
Debit Credit
Cash 1,000
Revenue (1,000 - 700) 300
Payable to third party 700
To recognise revenue when acting as agent for
issuance of points
L is a principal
If L is acting as a principal with respect to the points, then it recognises revenue
of 1,000 and an expense of 700 when its products are sold to customers and
the points are transferred to the customer. L records the following entry.
Debit Credit
Cash 1,000
Expense 700
Revenue 1,000
To recognise revenue when acting as principal for

issuance of points
Example 12B – Third party customer loyalty programme (2)
Company M participates in a customer loyalty programme operated by a third

party. Programme members earn points for purchases made in 2018 in M’s
stores and can redeem the accumulated points for goods supplied by either M
or the third party until 31 December 2019.
At the end of 2018, M has recognised contract liabilities of 2,000, representing
1,000 awards expected to be redeemed. In 2019, 500 awards are redeemed
with the third party, 400 awards are redeemed directly with M and 100 awards
expire without being redeemed. The third party invoices M 1.75 for each award
redeemed by members and M determines that it acts as an agent when the
third party supplies the awards. The cost of the inventory for the goods supplied
for points redeemed directly with M is 600.
In 2019, M recognises a liability of 875 (500 × 1.75), derecognises the contract

liabilities of 2,000 and recognises revenue of 1,125, which represents revenue
of 800 (400 × 2) for awards redeemed directly, 125 (500 × 0.25) for awards
redeemed through the third party and 200 (100 × 2) for lapsed awards.
Debit Credit
Contract liabilities 2,000

Cost of goods sold 600
Revenue 1,125
Inventory 600
To recognise revenue from loyalty programme
in 2019
10.5 Customers’ unexercised rights (breakage) |
Amounts payable to third party loyalty programme operators
When an entity participates in a loyalty programme operated by a third party, it

may be required to pay the third party for:
– carrying out administrative tasks with respect to the programme; and
– assuming the obligation to supply the awards.
It appears that it is appropriate for the entity to recognise amounts payable
to the third party for carrying out administrative tasks in profit or loss as an
expense over the period in which the loyalty programme is in effect.
It appears that it is appropriate for the entity to recognise amounts payable to
the third party for assuming the obligation to supply the awards when the third
party becomes obliged to supply the awards, by analogy to the principle for
recognising revenue in the standard. In Example 12B in this chapter, this occurs
when a customer chooses to redeem its awards from the third party in 2019.
10.5 Customers’ unexercised rights (breakage)
Overview
An entity may receive a non-refundable prepayment from a customer that gives

the customer the right to receive goods or services in the future. Common
examples include gift cards, vouchers and non-refundable tickets. Typically,
some customers do not exercise their right – this is referred to as ‘breakage’.
IFRS 15.B44–B45 An entity recognises a prepayment received from a customer as a contract liability
and recognises revenue when the promised goods or services are transferred
in the future. However, a portion of the contract liability recognised may relate
to contractual rights that the entity does not expect to be exercised – i.e. a
breakage amount.
IFRS 15.B46 The timing of revenue recognition related to breakage depends on whether the
entity expects to be entitled to a breakage amount – i.e. if it is highly probable
that recognising breakage will not result in a significant reversal of the cumulative
revenue recognised.
Expect to be entitled to a
breakage amount?
Yes No
Recognise in proportion Recognise when the

to the pattern of rights likelihood of the customer
exercised by the exercising its remaining
customer rights becomes remote
When the expectation changes
IFRS 15.B46 An entity considers the variable consideration guidance to determine whether –
and to what extent – the constraint applies (see 3.1.2). It determines the amount
of breakage to which it is entitled as the amount for which it is considered highly
probable that a significant reversal will not occur in the future. This amount is
recognised as revenue in proportion to the pattern of rights exercised by the
customer (proportional method) when the entity expects to be entitled to breakage.
Otherwise, the entity recognises breakage when the likelihood of the customer
exercising its remaining rights becomes remote (remote method).
IFRS 15.B47 If an entity is required to remit to a government entity an amount that is attributable
to customers’ unexercised rights – e.g. under applicable unclaimed property
or escheatment laws – then it recognises a financial liability until the rights are
extinguished, rather than revenue.
Example 1 – Sale of a prepaid phone card: Entity expects to be

entitled to breakage
Retailer R sells a prepaid phone card to Customer C for 100. On the basis
of historical experience with similar prepaid phone cards, R estimates that
10% of the prepaid phone card balance will remain unredeemed and that
the unredeemed amount will not be subject to escheatment. Because R can
reasonably estimate the amount of breakage expected and it is highly probable
that including the amount in the transaction price will not result in a significant
revenue reversal, R recognises the breakage revenue of 10 in proportion to the
pattern of exercise of C’s rights.
Specifically, when it sells the prepaid phone card R recognises a contract liability
of 100, because C prepaid for a non-refundable card. No breakage revenue is
recognised at this time.
If C redeems an amount of 45 in 30 days, then half of the expected redemption
has occurred (45 / (100 - 10) = 50%). Therefore, half of the breakage – i.e. (10 ×
50% = 5) – is also recognised.
On this initial prepaid phone card redemption, R recognises revenue of 50 – i.e.
revenue from transferring goods or services of 45 plus breakage of 5.
10.5 Customers’ unexercised rights (breakage) |
Example 2 – Sale of a prepaid phone card: Entity does not expect

to be entitled to breakage
Retailer C implements a new prepaid phone card programme. C sells Customer

D a prepaid phone card for 50. C does not have an obligation to remit the value
of unredeemed cards to any government authority or other entity – i.e. the
unredeemed amount will not be subject to escheatment. The prepaid phone
card expires two years from the date of issue.
Because this is a new programme, C has very little historical information.
Specifically, C does not have sufficient entity-specific information, nor does
it have knowledge of the experience of other service providers. Therefore, C
concludes that it does not have the ability to estimate the amount of breakage
that, if it were included in the transaction price, would be highly probable of not
resulting in a significant revenue reversal.
C therefore recognises the breakage when the likelihood of D exercising its
remaining rights becomes remote. This may occur at expiry of the prepaid
phone card or earlier if there is evidence to indicate that the probability has
become remote that D will redeem any remaining amount on the prepaid
phone card.
Example 3 – Airline expects ticket breakage and can estimate it

reliably
Airline B sells 100 non-refundable, flexible tickets for a flight from London to
Melbourne. The price of each ticket is 1,000. If a customer does not fly on the
scheduled flight date, then it can reschedule the flight within 12 months at no
additional charge. B’s historical data indicates that:
– 5% of customers purchasing tickets with similar terms do not fly on the
scheduled flight date;
– 20% of these customers (i.e. 1% of total sales) book an alternative flight
within the 12-month period; and
– 80% of these customers (i.e. 4% of total sales) never exercise their rights
before expiry.
Based on this historical data, B estimates that for these 100 tickets
95 customers will fly on the scheduled date, one will reschedule the flight
and four will not take their flight – i.e. the estimated breakage is 4,000 (4% ×
(100 × 1,000)).
B can reasonably estimate the amount of breakage expected and it is highly
probable that including the amount in the transaction price will not result in
a significant revenue reversal. Therefore, B recognises the estimated ticket
breakage of 4,000 in proportion to the pattern of exercise of the rights by the
customers as follows.
– On the date of the flight: 3,958 ((95 × 1,000) / (96 × 1,000) × 4,000).
– When one customer takes the rescheduled flight: 42 (4,000 - 3,958).
Constraint applies even though consideration amount is known
If an entity does not have a basis for estimating breakage – i.e. the estimate is
fully constrained – then it recognises the breakage as revenue only when the
likelihood becomes remote that the customer will exercise its rights.
When the entity concludes that it is able to determine the amount of breakage
to which it expects to be entitled, it estimates the breakage. To determine
the breakage amount, the entity assesses whether it is highly probable that
including revenue for the unexercised rights in the transaction price will not
result in a significant revenue reversal. Applying the guidance on the constraint
in this context is unique – the amount of consideration is known and has
already been received, but there is uncertainty over whether and when the
customer will redeem the amount paid by requiring the entity to transfer goods
or services in the future. Conversely, in other situations to which the constraint
applies – e.g. variable consideration – the total amount of consideration
is unknown.
Breakage does not constitute variable consideration
IFRS 15.B46 Although an entity considers the variable consideration guidance to determine
the amount of breakage, breakage itself is not a form of variable consideration
because it does not affect the transaction price. It is a recognition rather than a
measurement concept in the standard. For example, the transaction price for a
sale of a 50 gift card is fixed at 50; the possibility of breakage does not make the
transaction price variable. However, the expected breakage affects the timing of
revenue recognition.
Prepaid stored-value products may be financial liabilities
IAS 32.11, IFRS 9, IU 03-16 A prepaid stored-value product is a card with a monetary value stored on the
card itself – e.g. a gift card. The guidance under the standard on the recognition
of breakage excludes prepaid stored-value products that meet the definition of
financial liabilities.
These are instead accounted for using the applicable guidance under the
financial instruments standard.
Portfolio of data can be used for estimating expected breakage
An entity can use a portfolio of similar transactions as a source of data to

estimate expected breakage for an individual contract if the entity has a
sufficiently large number of similar transactions or other history. Doing so is not
using the portfolio approach (see Section 6.4).
10.6 Non-refundable up-front fees |
10.6 Non-refundable up-front fees
Overview
Some contracts include non-refundable up-front fees that are paid at or near
contract inception – e.g. joining fees for health club membership, activation fees
for telecommunication contracts and set-up fees for outsourcing contracts. The
standard provides guidance on determining the timing of recognition for these fees.
IFRS 15.B40, B48–B51 An entity assesses whether the non-refundable up-front fee relates to the transfer
of a promised good or service to the customer.
In many cases, even though a non-refundable up-front fee relates to an activity
that the entity is required to undertake to fulfil the contract, that activity does not
result in the transfer of a promised good or service to the customer. Instead, it is an
administrative task. For further discussion on identifying performance obligations,
see Chapter 2.
If the activity does not result in the transfer of a promised good or service to the
customer, then the up-front fee is an advance payment for performance obligations
to be satisfied in the future and is recognised as revenue when those future goods
or services are provided.
If the up-front fee gives rise to a material right for future goods or services, then the entity
attributes all of it to the goods and services to be transferred, including the material
right associated with the up-front payment. For further discussion on allocating the
transaction price and customer options, see Chapter 4 and Section 10.4, respectively.
IFRS 15.BC387 The non-refundable up-front fee results in a contract that includes a customer
option that is a material right if it would probably impact the customer’s decision on
whether to exercise the option to continue buying the entity’s product or service
(e.g. to renew a membership or service contract or order an additional product).
Does the fee relate to

Yes specific goods or No
services transferred to
customer?
Account for as an
Account for as a promised
advanced payment for
good or service
future goods or services
Recognise as revenue
Recognise allocated
when control of future
consideration as revenue on
goods or services is
transfer of promised good
transferred, which may include
or service
future contract periods
Example 1 – Non-refundable up-front fees: Annual contract
Cable Company C enters into a one-year contract to provide cable television to

Customer Z. In addition to a monthly service fee of 100, C charges a one-time
up-front fee of 50. C has determined that its set-up activity does not transfer a
promised good or service to Z, but is instead an administrative task.
At the end of the year, Z can renew the contract on a month-to-month basis at
the then-current monthly rate or can commit to another one-year contract at
the then-current annual rate. In either case, Z will not be charged another fee on
renewal. The average customer life for customers entering into similar contracts
is three years.
C considers both quantitative and qualitative factors to determine whether
the up-front fee provides an incentive for Z to renew the contract beyond the
stated contract term to avoid the up-front fee. If the incentive is important to Z’s
decision to enter into the contract, then there is a material right.
First, C compares the up-front fee of 50 with the total transaction price of 1,250
(the up-front fee of 50 plus the service fee of 1,200 (12 × 100)). It concludes that
the non-refundable up-front fee is not quantitatively material.
Second, C considers the qualitative reasons that Z might renew. These
include, but are not limited to, the overall quality of the service provided, the
services and related pricing provided by competitors and the inconvenience
to Z of changing service providers (e.g. returning equipment to C, scheduling
installation by the new provider).
C concludes that although avoidance of the up-front fee on renewal is a

consideration to Z, this factor alone does not influence Z’s decision over
whether to renew the service. C concludes based on its customer satisfaction
research data that the quality of service provided and its competitive pricing are
the key factors underpinning the average customer life of three years.
Overall, C concludes that the up-front fee of 50 does not convey a material right
to Z.
As a result, C treats the up-front fee as an advance payment on the contracted
one-year cable services and recognises it as revenue over the one-year contract
term. This results in monthly revenue of 104 (1,250 / 12) for the one-year
contract.
Conversely, if C determined that the up-front fee results in a contract that
includes a customer option that is a material right, then it would allocate the
total transaction price including the up-front fee between the one-year cable
service and the material right to renew the contract (see Section 10.4).
Quantitative and qualitative indicators are considered when

assessing up-front fees
An entity considers both quantitative and qualitative factors when assessing

whether a non-refundable up-front fee results in a contract that includes a
customer option that is a material right, because it would probably impact the
customer’s decision on whether to exercise the option to continue buying the
entity’s product or service. This is consistent with the notion that an entity
considers valid expectations of the customer when identifying promised goods
or services. Therefore, a customer’s perspective on what constitutes a ‘material
right’ includes consideration of qualitative factors as well as quantitative factors.
The following factors may be helpful in the assessment:
– the renewal price compared with the price in the initial contract with the up-
front fee;
– the availability and pricing of service alternatives; and
– the history of renewals.
Some factors that could influence a customer’s decision to renew the
contract may not be determinative on their own – e.g. the quality of service or
convenience of not changing providers.
An entity needs to consider all quantitative and qualitative factors and exercise
judgement in determining whether a non-refundable up-front fee results in a
contract that includes a customer option that is a material right.
Determining whether a non-refundable up-front fee relates to the

transfer of a promised good or service
In many cases, even though a non-refundable up-front fee relates to an activity

that the entity is required to undertake at or near contract inception to fulfil
the contract, that activity does not result in the transfer of a promised good or
service to the customer.
When assessing whether the up-front fee relates to the transfer of a promised
good or service, an entity considers all relevant facts and circumstances,
including whether:
– a good or service is transferred to the customer in exchange for the up-front
fee and the customer is able to realise a benefit from the good or service
received. If no good or service is received by the customer or if the good or
service is of little or no value to the customer without obtaining other goods
or services from the entity, then the up-front fee is likely to represent an
advance payment for future goods or services; and
– if the entity does not separately price and sell the initiation right or activities
covered by the up-front payment, then the payment may not relate to the
transfer of a promised good or service.
Up-front fee may need to be allocated
Even when a non-refundable up-front fee relates to a promised good or service,

the amount of the fee may not equal the relative stand-alone selling price of that
promised good or service; therefore, some of the non-refundable up-front fee
needs to be allocated to other performance obligations. For further discussion
on allocation, see Section 4.2.
Deferral period for non-refundable up-front fee depends on

whether the fee provides a material right
A non-refundable up-front fee may provide the customer with a material right
if the fee is significant enough that it is likely to impact the customer’s decision
on whether to reorder a product or service – e.g. to renew a membership or
service contract, or order an additional product.
If the payment of an up-front fee results in a contract that includes a
customer option that is a material right, then the fee is recognised over the
period during which the customer consumes the good or service that gives
rise to the material right. Determining that period will require significant
judgement, because it may not align with the stated contractual term or other
information historically maintained by the entity – e.g. the average customer
relationship period.
When the up-front fee is not deemed to provide a material right and the cost
amortisation period is determined to be longer than the stated contract period,
the period over which a non-refundable up-front fee is recognised as revenue
differs from the amortisation period for contract costs.
Consideration of whether a non-refundable up-front fee gives rise

to a significant financing component
IFRS 15.60 An entity will need to consider whether the receipt of an up-front payment
gives rise to a significant financing component within the contract. All relevant
facts and circumstances will need to be evaluated, and an entity may need
to apply significant judgement in determining whether a significant financing
component exists (see Section 3.2).
Up-front fees in the funds and insurance industries
In the funds industry, there may be two separate contracts:

– the first between the investor and the fund’s manager (brokerage or sales
contract, whereby the fund manager acts as an agent for the fund); and
– the second between the fund’s manager and the fund itself (investment
management contract).
The fund manager assesses whether the up-front fee receivable for the
sale of units of a (retail) fund relates to the transfer of a promised service
(i.e. a brokerage service) or if it is an advance payment for an investment
management service to be satisfied in the future.
By contrast, in the insurance industry it appears that there is generally no
distinct brokerage service because insurers enter into a single contract with
policyholders (investors) and the contract is sold as a net package.
Example 2 – Non-refundable up-front fees: Activity does not

transfer a good or service
IU 01-19 Stock Exchange S enters into a contract with Customer C to be listed on S’s
exchange. S charges C a non-refundable up-front fee on the initial listing of 50
and an ongoing annual listing fee of 100. The initial listing fee compensates S for
activities that it needs to undertake to enable admission to the exchange – e.g.
due diligence and reviewing the listing application.
S determines that the performance of the activities at contract inception does
not transfer a good or service to C – i.e. there is no promise in the contract other
than the service of being listed on the exchange.
S concludes that the non-refundable up-front fee is an advance payment for the
ongoing listing service.
Example 3 – Non-refundable up-front fees: Investment

management services
Investment Management Company U enters into a one-year contract to provide

investment management services to Investor X.
In addition to a monthly fee of 1% of the managed assets, U charges a one-time
subscription fee of 50. U determines that this is a set-up activity that does not
transfer a service to X, but instead is an administrative task. U expects to earn a
monthly fee of 10 from the contract.
At the end of the year, X can renew the contract on a month-to-month basis, at a
similar monthly rate. X will not be charged another fee on renewal.
U considers both quantitative and qualitative factors when determining whether
the up-front fee provides an incentive for X to renew the contract beyond the
stated contract term:
– U compares the up-front fee of 50 with the total transaction price of 170 – i.e.
the variable fee of 120 plus the up-front fee of 50. It concludes that the non-
refundable up-front fee is quantitatively material; and
– U considers the qualitative reasons why X might renew the contract. It notes
that competitors charge similar management fees and subscription fees to
investors for similar contracts.
These factors are also reflected in a strong history of renewals and an average
customer life that is longer than one year.
U concludes that the up-front fee results in a contract that includes a customer
option that is a material right. Therefore, it allocates the up-front fee between
the one-year investment management services and the material right to renew
the contract. U recognises the consideration allocated to the material right
over the renewal periods that give rise to the material right. This period may be
shorter than the average customer life.
Example 4 – Activation fee in a month-to-month telco wireless

contract
Telco B charges a one-time activation fee of 25 when Customer D enters into

a month-to-month contract for a voice and data plan that costs 50 per month.
D has no obligation to renew the contract in the subsequent month. If D does
renew, then no activation fee will be charged in the second or subsequent
months. B’s average customer life for month-to-month contracts is two years.
IFRS 15.B49 B concludes that there are no goods or services transferred to D on activation.
Therefore, the up-front fee does not relate to a good or service and the only
performance obligation in the arrangement is the voice and data plan. The
activation is merely an administrative activity that B needs to perform to allow D
to access its network.
The activation fee is considered an advance payment for future goods or
services and included in the transaction price in Month 1.
IFRS 15.B40 B then assesses whether the option to renew the contract without paying the
activation fee on renewal represents a material right for D. B considers both
qualitative and quantitative factors in determining whether D has a material right
to renew at a discount.
D pays 75 in Month 1 and would pay 50 in each subsequent month for which it
renews. Therefore, the ‘discount’ on the renewal rate is quantitatively material.
B also notes that D is likely to renew the contract beyond the first month based
on the average customer life, and that D’s decision to renew is likely to be
significantly affected by the up-front fee.
Therefore, B concludes that the activation fee is a prepayment for future goods
and services and represents a material right. B recognises the activation fee
over the period for which D consumes the services that give rise to the material
right. This period may be shorter than the average customer life.
10.7 Sales outside ordinary activities |
10.7 Sales outside ordinary activities
Overview
Certain aspects of the standard apply to the sale or transfer of non-financial

assets – e.g. intangible assets and property, plant and equipment – that are not
an output of the entity’s ordinary activities.
IAS 16, 38, 40 Under the standard, the guidance on measurement and derecognition applies to
the transfer of a non-financial asset that is not an output of the entity’s ordinary
activities, including:
– property, plant and equipment in the scope of IAS 16;
– intangible assets in the scope of IAS 38; and
– investment property in the scope of IAS 40.
IAS 16, 38, 40 When an entity sells or transfers a non-financial asset that is not an output of its
ordinary activities, it derecognises the asset when control transfers to the recipient,
using the guidance on transfer of control in the standard (see Section 5.1).
The resulting gain or loss is the difference between the transaction price measured
under the standard (using the guidance in Step 3 of the model) and the asset’s
carrying amount. In determining the transaction price (and any subsequent changes
to the transaction price), an entity considers the guidance on measuring variable
consideration – including the constraint, the existence of a significant financing
component, non-cash consideration and consideration payable to a customer (see
Chapter 3).
The resulting gain or loss is not presented as revenue. Likewise, any subsequent
adjustments to the gain or loss – e.g. as a result of changes in the measurement of
variable consideration – are not presented as revenue.
IFRS 10, IAS 28 When calculating the gain or loss on the sale or transfer of a subsidiary or associate,
an entity will continue to refer to the guidance in the consolidation standards,
respectively.
IFRS 16.98–103 If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor)
and then leases it back, then both entities apply the guidance in the revenue
standard to assess whether the transfer of the asset should be accounted for as
a sale.
– If the transfer leg qualifies as a sale, then the seller-lessee derecognises the
asset and calculates any gain or loss under the leases standard.
– If the transfer leg does not qualify as a sale, then the seller-lessee does not
derecognise the asset.
Example 1 – Sale of a single-property real estate
IFRS 3, 10, IAS 40 Consulting Company X decides to sell an office building to Buyer Y. X owns the
building through a wholly owned subsidiary whose only asset is the building.
The transaction is outside its ordinary consulting activities.
Title transfers to Y at closing and X has no continuing involvement in
the operations of the property, including through a leaseback, property
management services or seller-provided financing.
The arrangement consideration includes a fixed amount paid in cash at closing
plus an additional 5% contingent on obtaining a permit to re-zone the property
as a commercial property. X believes that there is a 50% chance that the re-
zoning effort will be successful.
When the sale is undertaken as a sale of the subsidiary X applies the

deconsolidation guidance in the consolidation standard and measures the
contract consideration at fair value.
Conversely, when the sale is undertaken as an asset sale, X applies the
derecognition guidance in the property, plant and equipment standard and
as part of determining the gain or loss from the transaction measures the
consideration to be received in accordance with the requirements set out in
Step 3 of the model.
Judgement required to identify ordinary activities
IFRS 15.BC53 Under the standard, a ‘customer’ is defined as a party that has contracted with
an entity to obtain goods or services that are an output of the entity’s ordinary
activities in exchange for consideration. Because ‘ordinary activities’ is not
defined, evaluating whether the asset transferred is an output of the entity’s
ordinary activities may require judgement.
In many cases, this judgement will be informed by the classification of a non-
financial asset – e.g. an entity that purchases a tangible asset may assess on
initial recognition whether to classify the asset as property, plant and equipment
or as inventory. Typically, the sale or transfer of an item that is classified as
property, plant and equipment will result in a gain or loss that is presented
outside revenue, whereas the sale or transfer of inventory will result in the
recognition of revenue.
10.7 Sales outside ordinary activities |
Accounting for a non-current non-financial asset held for sale

may result in a gain or loss on transfer of control because
consideration may differ from fair value
IFRS 5 When the carrying amount of a non-current non-financial asset is expected to

be recovered principally through a sale (rather than from continuing use), the
asset is classified as held-for-sale if certain criteria are met.
The standard does not override the measurement and presentation guidance
for non-current assets that are held for sale. Under this guidance, assets that
are held for sale are measured at the lower of fair value less costs to sell and
the carrying amount, which may differ from the expected transaction price
as determined under the standard. If the sale or transfer includes variable
consideration that is constrained under the standard, then the resulting
transaction price that can be recognised could be less than the fair value. This
could result in the recognition of a loss when control of the asset transfers
to the counterparty, even though the carrying amount may be recoverable
through subsequent adjustments to the transaction price. In these situations,
an entity may consider providing an early warning disclosure about the potential
consequences of these accounting requirements.
Applying transaction price guidance on measuring consideration

received or receivable
IFRS 5 Under the standard, an entity applies the guidance on the transaction price,
including variable consideration and the constraint. This may result in the
consideration initially being measured at a lower amount, with a corresponding
decrease in any gain – particularly if the constraint applies. In extreme
cases, an entity may recognise a loss on disposal even when the fair value
of the consideration exceeds the carrying amount of the item immediately
before disposal.
Little difference in accounting for sales of real estate to customers

and non-customers
IAS 16, 40 Because an entity applies the guidance on measuring the transaction price for
both customer and non-customer transactions, the difference in accounting for
an ordinary (customer) vs a non-ordinary (non-customer) sale of real estate is
generally limited to the presentation in the statement of comprehensive income
(revenue and cost of sales, or gain or loss).
Transfers to inventory are still possible if specific criteria are met
IAS 16.68A, 40.58 If an entity sells or transfers an item of property, plant and equipment or an
investment property, then it recognises a gain or loss on disposal outside
revenue. However, in limited circumstances it remains possible that an item
may be transferred to inventory before sale, in which case the entity recognises
revenue on disposal – for example:
– an entity that, in the course of its ordinary activities, routinely sells items of
property, plant and equipment that it has held for rental to others transfers
these assets to inventory when they cease to be rented and become held for
sale; and
– an entity transfers investment property to inventory when, and only when,
there is a change of use – e.g. the start of development with a view to sale.
11 Presentation | 299
11.1 Statement of financial position |
11 Presentation
Overview
This section addresses the various presentation requirements in the standard.
11.1 Statement of financial position

IFRS 15.105 An entity presents a contract liability or a contract asset in its statement of financial
position when either party to the contract has performed. The entity ‘performs’
by transferring goods or services to the customer, and the customer performs by
paying consideration to the entity.
(Net) contract (Net) contract

Rights and
asset liability
obligations
if rights > obligations if obligations > rights
IFRS 15.105–107 Any unconditional rights to consideration are presented separately as a receivable.
‘Contract liabilities’ are obligations to transfer goods or services to a customer
for which the entity has received consideration, or for which an amount of
consideration is due from the customer.
‘Contract assets’ are rights to consideration in exchange for goods or services that
the entity has transferred to a customer when that right is conditional on something
other than the passage of time. Contract assets are assessed for impairment under
the requirements in the financial instruments standard.
IFRS 15.109 An entity may use alternative captions for the contract assets and contract liabilities
in its statement of financial position. However, it needs to provide sufficient
information to distinguish a contract asset from a receivable.
Example 1 – Contract liability and receivable: Cancellable contract
IFRS 15.IE198 On 1 January 2019, Manufacturer D enters into a cancellable contract to transfer
a product to Customer E on 31 March 2019. The contract requires E to pay
consideration of 1,000 in advance on 31 January 2019. E pays the consideration
on 1 March 2019 – i.e. after the due date. D transfers the product on 31 March
2019. D records the following entries to account for:
– cash received on 1 March 2019 and the related contract liability; and
– revenue on transfer of the product on 31 March 2019.
In this example, D does not have an unconditional right to consideration on

31 January 2019 and therefore it does not have a receivable.
Debit Credit
1 March 2019
Cash 1,000
Contract liability 1,000
To record cash of 1,000 received (cash is
received in advance of performance)
31 March 2019
Revenue 1,000
To record D’s satisfaction of performance
obligation
Contract asset and contract liability – Based on past performance
IFRS 15.IE199–IE200 The standard requires an entity to present a contract asset or contract liability
after at least one party to the contract has performed. However, Example 38 in
the standard suggests that an entity recognises a receivable when it is due if
the contract is non-cancellable, because the entity has an unconditional right to
consideration (for further discussion, see 11.1.1).
Single contract asset or contract liability for contracts with

multiple performance obligations
IFRS 15.BC317 An entity presents a contract asset or a contract liability in its statement of
financial position when at least one party to the contract has performed. When
a contract contains multiple performance obligations, it is possible that at a
given point in time some performance obligations could be in a contract asset
position and others in a contract liability position. In this case, an entity presents
a single contract asset or liability representing the net position of the contract as
a whole. The entity does not present both a contract asset and a contract liability
for the same contract. It may be challenging to determine a single net position
in some circumstances if, for example, different systems are used for different
In addition, if under the contract combination guidance (see Section 1.4) an

entity combines two or more contracts and accounts for them as a single
contract, then it presents a single contract asset or contract liability for that
combined contract. This is consistent with the guidance on the combination of
contracts that specifies determining the unit of account based on the substance
of the transaction, rather than its legal form.
Contract assets and contract liabilities for multiple contracts are

not netted
IFRS 15.BC317–BC318 A single contract is presented either as a net contract asset or as a net contract
liability. However, if an entity has multiple contracts, then it cannot present on
a net basis contract assets and contract liabilities of unrelated contracts (i.e.
contracts that cannot be combined under Step 1). Therefore, it presents total
net contract assets separately from total net contract liabilities, rather than a net
position on all contracts with customers.
IFRS 15.BC301 An asset arising from the costs of obtaining a contract is presented separately
from the contract asset or liability.
IFRS 15.BC320–BC321 The standard does not specify whether an entity is required to present its
contract assets and contract liabilities as separate line items in the statement
of financial position or whether it can aggregate them with other items in the
statement of financial position – e.g. include contract assets in an ‘other assets’
balance. Therefore, an entity applies the general principles for the presentation
of financial statements and the offsetting requirements.
Impairment assessment of contract assets for contracts with

multiple performance obligations
IFRS 15.107, 113(b), BC317 To assess a contract asset for impairment, an entity applies the requirements in
the financial instruments standard and uses the expected credit loss method.
There is limited guidance on how to perform the impairment assessment of
contract assets. For contracts with multiple performance obligations, a question
arises over whether the impairment assessment should be performed at the
contract level or the performance obligation level.
It appears that for contracts with multiple performance obligations an entity
should perform the impairment assessment of contract assets at the contract
level. This is because the net contract asset/liability position best represents the
entity’s real exposure to the credit risk of its customer.
Impairment assessment of contract assets when the

consideration is variable
IFRS 15.56–58, 107, 113(b) When a contract includes variable consideration, an entity recognises revenue
at the constrained amount (see 3.1.2). As a result, any related contract asset
is measured based on the constrained amount. In these cases, a question
arises over whether the impairment assessment of the contract asset should
be performed based on the constrained or the unconstrained amount of the
related consideration.
It appears that the impairment assessment of the contract asset should
be performed based on the constrained consideration because under this
approach the expected cash flows are estimated on a basis consistent with the
measurement of the contract asset.
We believe that an alternative approach would be to compare the theoretical

unconstrained contract asset with the unconstrained consideration, and
recognise any resulting impairment loss in proportion to the recognised contract
asset. This would result in the same impairment loss amount as the approach
based on the constrained amounts.
For a detailed illustration, see Example 2 in this chapter.
Classification as current vs non-current
IAS 1.60–61, 65–71 An entity applies the general principles for presenting assets and liabilities as
current or non-current in the statement of financial position to contract assets,
contract liabilities and costs to obtain and costs to fulfil a contract arising under
the standard. In applying these principles, an entity considers the expected
timing of performance, payment or utilisation under the contract.
As a first step, an entity considers whether an asset or a liability arising under

the standard is expected to be realised or settled within the entity’s operating
cycle. If it is, then it is classified as current. To determine its operating cycle, the
entity considers the time between the acquisition of assets for processing and
their realisation in cash or cash equivalents. It is the ultimate realisation in cash
that matters for the analysis, rather than a change in the nature of the item – e.g.
a contract asset becoming a trade receivable.
If an entity has different operating cycles for different parts of the business –
e.g. retail and construction – then the classification of an asset as current is
based on the normal operating cycle that is relevant to that particular asset. In
our view, the entity need not identify a single operating cycle.
If an asset is realised or a liability is settled beyond an entity’s operating cycle,
then to determine the appropriate classification in the statement of financial
position the entity considers the nature of that asset or liability and applies the
existing guidance for similar assets or liabilities. In determining the appropriate
classification, the entity considers whether:
– the entire item should be presented as current or non-current; or
– it should be split into current and non-current components.
The nature of contract assets, contract liabilities and costs to obtain or costs to
fulfil a contract may differ under different contracts. An entity needs to consider
all facts and circumstances in determining the nature of the item.
An example of the analysis is included in the table below.
Item Similar in nature to… Classification
Asset arising from Intangible assets Non-current in its

costs to obtain a entirety
contract
Asset arising from Inventory Current in its entirety

costs to fulfil a
contract
Contract asset Trade receivables Current and non-

current – split
Contract liabilities Other operating liabilities Current in its entirety
Contract liabilities Long-term borrowings Current and non-

current – split
If an entity classifies an asset or a liability as current, but does not expect

to realise or settle it within the 12 months after the reporting period, then
it discloses the amount expected to be realised or settled after more than
12 months, as required by the presentation standard.
For detailed illustrations, see Examples 4–7B in this chapter.
Presentation of costs to obtain and costs to fulfil a contract in the

statement of financial position
IAS 1.29–30A, 55, 58–59, 77, IFRS 15.110 Neither the revenue nor the presentation standard provides specific guidance
on the presentation of assets arising from the costs to obtain and costs to fulfil
a contract. An entity applies judgement, based on considerations of materiality,
in determining whether these items should be presented separately in the
statement of financial position or can be aggregated with other items and
disclosed in the notes. In doing so, an entity assesses:
– the nature and liquidity of assets;
– the function of assets within the entity; and
– the measurement basis of the item.
An entity cannot aggregate material items that have a different nature or
function.
If an entity determines on the basis of materiality considerations that contract

costs do not warrant separate presentation in the statement of financial
position, then it considers whether there is another line item(s) with which
it would be appropriate to aggregate them. The key factor in this analysis is
the nature of items being considered for aggregation. For example, in some
cases costs to obtain a contract may be similar in nature to an intangible asset
– e.g. customer relationship. This is because those costs are amortised over a
period beyond the existing contract term taking into account future anticipated
contracts. Conversely, costs to fulfil a contract may be similar in nature to
prepaid operating costs or work in progress – i.e. inventory.
The nature of costs to obtain or costs to fulfil a contract may differ under
different contracts and an entity needs to consider all facts and circumstances
in determining the nature of the item.
Example 2 – Impairment assessment of contract assets: Variable

consideration
Company X enters into a contract with Customer C to deliver 100 tonnes

of copper concentrate for 100. C determines the actual quantity of copper
delivered after processing the concentrate. X delivers copper concentrate on
20 December and C is expected to confirm the actual quantity on 15 January.
X determines that the consideration under the contract is variable and therefore
it applies the constraint. On 20 December, X recognises revenue and a contract
asset of 80. At 31 December, X assesses the contract asset for impairment. X
expects to recover 95% of the transaction price.
We believe that X should perform the impairment assessment of the contract
asset based on the constrained consideration of 80 and recognise an
impairment loss of 4 (80 - 80 × 95%).
Alternatively, X can perform the impairment assessment based on the

unconstrained amounts and recognise the impairment loss in proportion to
the contract assets recognised. This would lead to the same outcome as the
impairment assessment based on the constrained amounts – i.e. an impairment
loss of 4 ((100 - 100 × 95%) × 80 / 100).
Example 3 – Impairment assessment of contract assets: Contracts

with multiple performance obligations
Company M enters into a contract with Customer L to provide tax advice,

accounting training to L’s employees and advice on implementing a new
accounting standard for total consideration of 300. M determines that the
contract contains three separate performance obligations. Under the contract,
M has an unconditional right to receive consideration on issuing an invoice
for work performed. At 31 December, M has a trade receivable of 120 and a
contract asset of 14.
M allocates revenue, invoiced amounts and contract assets to each
performance obligation as follows.
PO1 PO2 PO3 Total
Revenue allocated 80 100 120 300

Percentage of
completion 60% 50% 30%
Revenue recognised 48 50 36 134
Invoiced amounts
allocated1 32 40 48 120
Contract asset (liability) 16 10 (12) 14
Note
1. In this example, the invoiced amounts are allocated based on the stand-alone selling
price of each separate performance obligation, consistently with the allocation of
revenue.
M expects to recover 95% of its trade receivables and contract asset.

We believe that M should assess its contract asset for impairment at the
contract level and recognise an impairment loss of 0.7 (14 - 14 × 95%) because
the net contract asset of 14 best represents M’s real exposure to L.
Example 4 – Current vs non-current classification: Contract assets:

Telco
IAS 1.61 Telco T enters into a contract with Customer C to provide a handset and
24 months of service. The contract term is 24 months because of significant
penalties that are due on cancellation. Under the contract, C pays 200 up-front
on receiving the handset and 70 at the end of each month. The stand-alone
selling prices of the handset and monthly services are 600 and 65 respectively.
T allocates 522 to the handset and 56.58 per month to the services.
On delivering the handset, T recognises a contract asset of 322 (522 - 200).
Of that amount, 161 (322 / 24 × 12) will be collected within 12 months and the
remaining 161 (322 - 161) will be collected after 12 months.
T notes that its contracts with customers are generally of 24 months. Therefore,
it concludes that its operating cycle is 24 months. As such, T classifies the entire
amount of the contract asset of 322 as a current item. T also discloses amounts
that are expected to be recovered after 12 months in accordance with the
requirements in the presentation standard.
Modifying the fact pattern, if T’s contracts within the same business were of
different duration and it defaults to the 12-month operating cycle, then it would
look at the nature of the contract asset. It may determine that it is similar to a
trade receivable and therefore the amount would be split into a current and non-
current portion. The non-current portion would subsequently be reclassified into
current when it is due within 12 months.

Real estate developer
IAS 1.61 Developer D enters into a contract with Customer P to construct a building for
fixed consideration of 100 million. The construction takes 30 months to complete.
The milestone payments and actual construction progress are as follows (in
millions).
Actual Contract
Milestone construction assets/
Month payments progress (liability)
0 (at inception) 5 0% (5)

12 10 30% 15
24 10 80% 55
30 65 100% 10
42 10 100% -
Of the contract assets of 15 million recognised at the end of the first 12 months,
10 million will be collected within 12 months and the remaining 5 million will be
collected after 12 months.
D considers the duration of its projects in determining its operating cycle. If

all projects are performed within a similar timeframe, then this may indicate
that D’s operating cycle is identifiable and approximates the average duration
of its projects – e.g. 30 months. In this case, the entire amount of the contract
asset of 15 is presented as a current item. The amounts that are expected to
be recovered after 12 months are separately disclosed in accordance with the
requirements in the presentation standard.
The analysis is similar to Example 4 in this chapter if D’s projects are of different
duration and it defaults to the 12-month operating cycle.

Service concession
IFRIC 12.15, 17 Company S enters into a contract with the government to build a toll bridge.
Construction takes 30 months. On completion, S receives a right to charge
tolls at the bridge for 10 years (i.e. it recognises an intangible asset as the
consideration for its construction service).
S recognises a contract asset as the construction progresses and an intangible
asset when the construction is completed and it has a right to charge the toll.
Similar to Examples 4 and 5 in this chapter, S needs to consider its operating
cycle. If S defaults to a 12-month operating cycle, then it considers the nature of
the asset. In this example, the nature may be similar to an intangible asset and
therefore it may be appropriate to classify the contract asset as a non-current
item in its entirety.
Example 7A – Current vs non-current classification: Contract

liabilities: Full prepayment for a good that transfers at a point in
time
Developer D enters into a contract with Customer S for a sale of a residential

unit. The development takes three years and control over the unit transfers
at a point in time on completion of construction. D requires S to pay the full
contract price of 300 on entering into the contract. D recognises a contract
liability of 300.
Similar to Examples 4–6 in this chapter, D considers its operating cycle. If it
approximates three years, then the contract liability is classified as current.
If D defaults to a 12-month operating cycle, then there are two approaches.
Approach 1 – Operating nature

Under this approach, D determines that the nature of the contract liability is
similar to other operating items. Therefore, it is classified as current.
Approach 2 – Long-term borrowing nature

Under this approach, D determines that the nature of the advance received
is similar to a long-term borrowing. D classifies 300 as non-current on initial
recognition and reclassifies the balance as current 12 months before the
expected completion of the project and recognition of revenue.
Example 7B – Current vs non-current classification: Contract

liabilities: Full prepayment for a good that transfers over time
Modifying Example 7A, control over the residential unit transfers over time.
Developer D uses the cost-to-cost method to measure its progress and
performs evenly throughout the project.
The analysis is the same as in Example 7A except that under Approach 2 when
D defaults to the 12-month operating cycle D classifies 200 as non-current and
100 related to the amount of revenue expected to be recognised during the next
12 months as current. D reclassifies the balance of 200 proportionally as current
as it progresses with the construction based on the measure of progress.
11.1.1 Contract assets vs receivables

IFRS 15.105, 108, IFRS 9 If the entity has an unconditional right to consideration, then this is presented as a
receivable. A right to consideration is ‘unconditional’ if only the passage of time is
required before payment becomes due. Receivables are presented separately from
contract assets and cannot be netted against contract liabilities.
An entity accounts for receivables, including their measurement and disclosure,
using the financial instruments guidance. On initial recognition of a receivable,
any difference between the measurement of that receivable using the financial
instruments guidance (e.g. impairment as a result of credit risk) and the
corresponding amount of revenue recognised is presented as an expense. Any
subsequent impairment of the receivable is also accounted for as an expense.
Example 8 – Contract liability and receivable: Non-cancellable

contract
IFRS 15.IE199–IE200 Modifying Example 1 in this chapter, assume that Manufacturer D’s contract
is non-cancellable. D has an unconditional right to consideration on 31 January
2019 and therefore it recognises a receivable. D records the following entries to
account for:
– the receivable on 31 January 2019 and the related contract liability;
– cash received on 1 March 2019; and
– revenue on transfer of the product on 31 March 2019.
Debit Credit
31 January 2019
Receivable 1,000
To record consideration due
Debit Credit
1 March 2019
Cash 1,000
Receivable 1,000
To record D’s receipt of cash
31 March 2019
Revenue 1,000
To record D’s satisfaction of performance
obligation
If D issued the invoice before 31 January 2019 – i.e. the payment due date –
then it would not record a receivable before 31 January 2019 because it would
not yet have an unconditional right to consideration.
Receivable vs contract asset – Distinction based on unconditional

right to consideration
IFRS 15.IE201–IE204 Under the standard, an entity recognises a receivable when it has a right to
consideration that is unconditional. The timing of recognition of receivables
is critical because it may impact their classification and measurement. For
example, there may be an impact on the classification assessment under the
financial instruments standard, or the fair value of a receivable may be different
from the carrying amount of the related contract asset. Determining when to
recognise a receivable may be straightforward in some cases but challenging in
others. The following flowchart may help with the analysis.
Has the entity performed?
No Yes
Does the entity have a Does the entity have an

contractual right to bill? unconditional right to cash?
Yes No No Yes
Receivable
No asset or
and a contract Contract asset Receivable
liability
liability
The first step in the analysis is to determine whether the entity has performed
under the contract. If it has, then the entity considers whether it has an
unconditional right to receive cash. The right to receive cash may be conditional
on continuing performance under the contract. Example 39 in the standard
illustrates a scenario in which the right to consideration for a delivered product
is conditional on the delivery of a second product – i.e. an entity has an
unconditional right to consideration only after both products are transferred.
Because the right to consideration under the contract is not unconditional, the
entity recognises a contract asset instead of a receivable.
IFRS 15.108, IE199–IE200 Under some contracts, an entity has a right to bill the customer in advance of
delivering a good or service. In these cases, it appears that the entity should
generally recognise a receivable and a contract liability when both of the
following conditions are met:
– the contract is non-cancellable; and
– the entity has an unconditional right to bill the customer under the payment
terms of the contract.
Under other contracts, an entity may have a right to demand payment for
performance completed to date if the contract is terminated by the customer
or another party. If the contract is not terminated in this way, then the entity
has a right to bill the customer only once the contract is complete. It appears
that in these cases, the entity should not generally recognise a receivable as
it performs. This is because, before completion of the contract, the right to
compensation is conditional on termination of the contract. For an illustration,
see Example 9A in this chapter.
Receivable vs contract asset – Refund obligations do not impact

the analysis
IFRS 15.BC326 An entity’s possible obligation to refund consideration to a customer in

the future does not affect the entity’s present right to the gross amount of
consideration. When a right of return exists, an entity recognises a receivable
and a separate refund liability for the amount of the estimated refund (see
Section 10.1).
Milestone payments under over-time contracts
Under some contracts for which revenue is recognised over time, an entity
may have a right to bill the customer when it achieves a specific stage of the
project. These payments are often referred to as ‘milestone payments’. It
appears that in these cases, an entity should recognise a receivable when the
milestone payment is due if it is not conditional on the completion of the entire
performance obligation. For an illustration, see Example 9B in this chapter.
Recognising a receivable when the consideration is variable
IFRS 15.108, IE205–IE208, IASBU 12–15 An entity may have a right to receive partially or wholly variable consideration for
a previously transferred good or service. It appears that in these cases the entity
should recognise a receivable to the extent that it has an unconditional right to
a fixed amount of consideration. For variable amounts, the timing of recognition
of a receivable depends on the nature of variability. We believe that the following
is one acceptable approach to accounting for variable amounts.
– Variable amounts subject to a refund: Recognise a receivable when the entity
has a present right to payment, even if the payment may be subject to a
refund in the future.
– Other variable consideration in the scope of the revenue standard: Recognise
a receivable only after the amounts become fixed. This is because the
payment for these amounts depends on conditions other than the passage
of time (e.g. possible actions by the entity, customers or third parties – see
Section 3.1).
– Variable consideration not in the scope of the revenue standard: This
variability does not prevent recognition of receivables. Instead, it is
considered to be a part of the contractual terms of the receivable recognised
and may impact the classification and measurement of the receivable under
the financial instruments standard (e.g. changes in the market price of a
commodity that has been delivered – see Section 3.1).
For an illustration, see Example 10 in this chapter.
Example 9A – Recognising receivables: Compensation on

termination
On 1 January Year 1, Manufacturing Company X enters into a contract to

construct a specialised asset for Customer S for 1,000. Under the payment
terms in the contract, all consideration is payable on completion of construction.
However, if the contract is terminated by S then X has an enforceable right to
payment for its performance completed to date. X determines that Criterion 3
for over-time revenue recognition is met (see Section 5.2).
On 31 March Year 1, construction is 25% complete and X recognises revenue of
250. We believe that X should recognise a contract asset, and not a receivable,
of 250. This is because X’s right to payment for performance completed to date
is conditional on early termination of the contract.
Example 9B – Recognising receivables: Milestone payments
Modifying Example 9A, Manufacturing Company X is entitled to a milestone

payment of 100 when construction is 25% complete. We believe that on
31 March Year 1, X should recognise a receivable of 100 and a contract asset of
150. This is because on that date X has an unconditional right to the milestone
payment of 100.
Example 10 – Recognising receivables: Variable consideration
On 1 January Year 1, Real Estate Company Y sells a plot of land, which it

classified as inventory, to Customer C. Under the payment terms in the
contract, C will pay Y 1,000 on 1 April Year 1. In addition, if C obtains a planning
permit to redevelop the land, then it will pay an additional 300 to Y. On 1 January
Year 1, Y determines that it is not highly probable that C will obtain the permit
and therefore it recognises revenue of 1,000 (see 3.1.2).
On 30 June Year 1, C reaches the final stage of the process for receiving the
planning permit. Therefore, Y determines that it is highly probable that the
additional consideration will be received and recognises additional revenue
of 300. On 31 December Year 1, C obtains the permit and the additional
consideration becomes billable under the payment terms in the contract.
We believe that on 1 January Year 1, Y should recognise a receivable of 1,000
for the land sold. On 30 June Year 1, Y should recognise revenue of 300 and
a contract asset. This is because at this date receipt of this amount remains
conditional on C receiving the planning permit for the land. On 31 December
Year 1, Y should recognise a receivable of 300 because on that date the
additional amount becomes fixed.
11.2 Statements of profit or loss and cash flows

Neither the revenue standard nor the standards dealing with presentation matters
include specific requirements for presentation of items related to contracts with
customers in the statement of profit or loss and in the statement of cash flows.
This section provides our insights on some common issues.
11.2 Statements of profit or loss and cash flows |
Presenting ‘revenue from contracts with customers’ separately on

the face of the statement of profit or loss is not required
IFRS 15.113, IAS 1.29–30, 85 It appears that an entity is not required to present revenue from contracts with
customers as a separate line item in the statement of profit or loss and may
aggregate it with other types of revenue considering the requirements in the
presentation standard. However, in providing a separate disclosure of revenue
from contracts with customers – either in the notes or in the statement of profit
or loss – we believe that an entity should not include amounts that do not fall in
the scope of the revenue standard (see Section 12.1).
Interest income recognised from a significant financing

component may be presented as ‘revenue’ but not ‘revenue from
contracts with customers’
IFRS 15.A, 65 An entity that regularly provides customers with implicit financing may earn
interest income in the course of its ordinary activities. If so, then it may present
interest income arising from a significant financing component as a type of
revenue in the statement of profit or loss. However, this interest income has to
be presented separately from revenue from contracts with customers.
Presentation of amortisation costs in the statement of profit or

loss
IAS 1.97, 99 If an entity presents its expenses by nature, then judgement is required
to determine the nature of the expenses arising from the amortisation of
capitalised contract costs. The appropriate classification may often depend on
the nature of the entity and the industry in which it operates.
Similarly, if an entity presents its expenses by function, then it applies
judgement to allocate the amortisation costs to the appropriate function.
There is no guidance in IFRS on how specific expenses are allocated to
functions. An entity establishes its own definitions of functions – e.g. cost of
sales, distribution and administrative activities – and applies these definitions
consistently. It may be appropriate to disclose the definitions used.
In all cases, an entity is subject to the general requirements in the presentation
standard to ensure that its presentation is not misleading and is relevant to an
understanding of its financial statements.
For an illustration, see Examples 11A and 11B in this chapter.
Classification of cash flows related to contract costs depends on

the nature of the activity
IAS 7.6, 11, 14(c), 16(a), IU 03-12, 07-12, 03-13 If an entity capitalises costs to obtain or fulfil a contract, then it needs to
determine how to present the related cash outflows in the statement of cash
flows. Cash flows are generally classified as operating, investing or financing
based on the nature of the activity to which they relate, rather than on the
classification of the related item in the statement of financial position.
Cash flows from operating activities are primarily derived from the principal
revenue-producing activities of an entity. Some entities may, therefore,
present all cash flows related to their revenue-generating activity, including
costs to obtain and costs to fulfil a contract with a customer, as part of
operating activities.
Other entities may analyse costs to obtain a contract and costs to fulfil a
contract differently. Although they link costs to fulfil a contract to the revenue-
generating activity, and therefore present the related cash flows as part of
operating activities, they argue that costs to obtain a contract are more closely
linked to their long-term business objective of obtaining and building a customer
relationship, which may extend beyond the boundaries of an individual contract.
This activity is of an investing nature and therefore the cash flows related to
costs to obtain a contract are presented as part of investing activities.
National securities regulators may have specific requirements on this matter.
Example 11A – Presentation of amortisation of contract costs:

Expenses by function
Company X presents its expenses by function. During the year, X has

recognised amortisation of:
– a commission to sales staff of 20: i.e. costs to obtain a contract; and
– initial third party testing fees of 50: i.e. costs to fulfil a contract.
X includes the commission to sales staff in selling and distribution expenses,
and the initial third party testing fees in cost of sales.
11.2 Statements of profit or loss and cash flows |
Example 11B – Presentation of amortisation of contract costs:

Expenses by nature
Modifying Example 11A, Company X presents its expenses by nature. Based on

its analysis, X determines that the commission to sales staff is similar in nature
to other staff costs and therefore presents the amortisation of the commission
as part of employee expenses. Conversely, if X determined that the commission
were similar in nature to an investment in a customer relationship, then it may
present amortisation of the commission together with amortisation of other
non-current assets.
X determines that the initial third party testing fees are similar in nature to other
contract fulfilment costs and presents them in the same line as those other
contract fulfilment costs.
12 Disclosure
Overview
The standard contains both qualitative and quantitative disclosure requirements

for annual and interim periods.
12.1 Annual disclosure

IFRS 15.110 The objective of the disclosure requirements is for an entity to disclose sufficient
information to enable users of the financial statements to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers.
IFRS 15.113, 129 An entity is required to disclose, separately from other sources of revenue,
revenue recognised from contracts with customers – i.e. revenue in the scope of
the standard – and any impairment losses recognised on receivables or contract
assets arising from contracts with customers. If an entity elects either the practical
expedient not to adjust the transaction price for a significant financing component
(see Section 3.2) or the practical expedient not to capitalise costs incurred to obtain
a contract (see Section 7.1), then it discloses this fact.
IFRS 15.113, IAS 1.29–30, 85 It appears that an entity is not required to present revenue from contracts with
customers as a separate line item in the statement of profit or loss and may
aggregate it with other types of revenue considering the requirements in the
presentation standard. However, in providing a separate disclosure of revenue from
contracts with customers – either in the notes or in the statement of profit or loss –
we believe that an entity should not include amounts that do not fall in the scope of
the revenue standard.
IFRS 15.114–115, B87–B89 The standard includes disclosure requirements on the disaggregation of revenue,
contract balances, performance obligations, significant judgements and assets
recognised to obtain or fulfil a contract. For further discussion on the required
transition disclosures, see Chapter 13.
12 Disclosure | 317
12.1 Annual disclosure |
Performance
obligations
(see 12.1.3)
Contract Significant
balances judgements
(see 12.1.2) (see 12.1.4)
Understand
Disaggregation nature, amount, Costs to obtain or
of revenue timing and fulfil a contract
(see 12.1.1) uncertainty of (see 12.1.5)
revenue and
cash flows
See our Guide to annual financial statements – Illustrative disclosures 2018 and
Guide to annual financial statements – IFRS 15 Revenue supplement for example
disclosures.
Revenue is a gross number
IFRS 15.A Some entities may present detailed information about their performance in the
financial statements and other parts of their annual report on a net basis – e.g.
banks often present detailed information about commission and fee income for
the purposes of their segment reporting on a net basis, although they act as a
principal in those transactions.
Revenue from contracts with customers is a gross inflow. Therefore, an entity
cannot use net figures to meet the disclosure requirements in the revenue
standard.
12.1.1 Disaggregation of revenue

IFRS 15.114, B89 The standard requires the disaggregation of revenue from contracts with customers
into categories that depict how the nature, amount, timing and uncertainty of
revenue and cash flows are affected by economic factors, and includes examples of
these categories.
Geography
Type of good or
Contract duration
service
Timing of transfer Example Market or type

of good or service categories of customer
Sales channels Type of contract
IFRS 15.115, B87–B88 An entity also discloses the relationship between the disaggregated revenue and
the entity’s segment disclosures.
In determining these categories, an entity considers how revenue is disaggregated in:
a. disclosures presented outside the financial statements: e.g. earnings releases,
annual reports or investor presentations;
b. information reviewed by the chief operating decision maker for evaluating the
financial performance of operating segments; and
c. other information similar to (a) and (b) that is used by the entity or users of
the entity’s financial statements to evaluate performance or make resource
allocation decisions.
Example 1 – Disaggregation of revenue
IFRS 8, IFRS 15.IE210–IE211 Company X reports the following segments in its financial statements:
consumer products, transport and energy. When X prepares its investor
presentations, it disaggregates revenue by primary geographic markets, major
product lines and the timing of revenue recognition – i.e. separating goods
transferred at a point in time and services transferred over time.
12 Disclosure | 319
X determines, based on its analysis, that the categories used in the investor
presentations can be used for the disaggregation disclosure requirement. The
following table illustrates the disaggregation disclosure by primary geographical
market, major product line and timing of revenue recognition. It includes
a reconciliation showing how the disaggregated revenue ties in with the
consumer products, transport and energy segments.
Consumer
Segments products Transport Energy Total
Primary
geographic
markets
North America 990 2,250 5,250 8,490
Europe 300 750 1,000 2,050
Asia 700 260 - 960
1,990 3,260 6,250 11,500
Major goods/
service lines
Office supplies 600 - - 600
Appliances 990 - - 990
Clothing 400 - - 400
Motorcycles - 500 - 500
Cars - 2,760 - 2,760
Solar panels - - 1,000 1,000
Power plant - - 5,250 5,250
1,990 3,260 6,250 11,500
Timing of
revenue
recognition
Goods transferred
at a point in time 1,990 3,260 1,000 6,250
Services
transferred over
time - - 5,250 5,250
1,990 3,260 6,250 11,500
No minimum number of categories required
Although the standard provides some examples of disaggregation categories, it

does not prescribe a minimum number of categories. The number of categories
required to meet the disclosure objective will depend on the nature of the
entity’s business and its contracts.
Disaggregation of revenue may be at a different level from

segment disclosures
IFRS 15.114 The level of disclosure under the standard is not restricted to the information
that the chief operating decision maker uses to assess the entity’s performance
and allocate its resources. Although an entity considers that information when
preparing its disaggregation of revenue disclosures, it also considers other
similar information that is used to evaluate performance or make resource
allocation decisions.
As a result, some entities may not be able to meet the objective in the standard
for disaggregating revenue by providing segment revenue information and
may need to use more than one type of category. Other entities may meet the
objective by using only one type of category. Even if an entity uses consistent
categories in the segment note and in the revenue disaggregation note, further
disaggregation of revenue may be required because the objective of providing
segment information under the segment reporting standard is different from
the objective of the disaggregation disclosure under the revenue standard and,
unlike in the segment reporting standard, there are no aggregation criteria in the
revenue standard.
For example, an entity’s chief operating decision maker regularly reviews a single
report that combines the financial information about economically dissimilar
businesses – i.e. these businesses form part of one operating segment.
However, if segment management makes performance or resource allocation
decisions within the segment based on that disaggregated information, then
those economically dissimilar businesses could include revenue that would
meet the requirements for disaggregation disclosure under the standard.
Nonetheless, an entity does not need to provide disaggregated revenue
disclosures if the information about revenue provided for the purposes of
the segment reporting meets the revenue disaggregation requirements and
those revenue disclosures are based on the recognition and measurement
requirements in the standard.
12.1.2 Contract balances

IFRS 15.116–118 An entity is required to disclose all of the following:
– the opening and closing balances of contract assets, contract liabilities and
receivables from contracts with customers (if they are not otherwise separately
presented or disclosed);
– the amount of revenue recognised in the current period that was included in the
opening contract liability balance;
– the amount of revenue recognised in the current period from performance
obligations satisfied (or partially satisfied) in previous periods: e.g. changes in
transaction price;
– an explanation of how the entity’s contracts and typical payment terms will affect
its contract asset and contract liability balances; and
12 Disclosure | 321
– an explanation of the significant changes in the balances of contract assets

and contract liabilities, which should include both qualitative and quantitative
information, such as:
- changes arising from business combinations;
- cumulative catch-up adjustments to revenue (and to the corresponding
contract balance) arising from a change in the measure of progress, a change
in the estimate of the transaction price or a contract modification;
- impairment of a contract asset; or
- a change in the timeframe for a right to consideration becoming unconditional
(reclassified to a receivable) or for a performance obligation to be satisfied (the
recognition of revenue arising from a contract liability).
Changes in the transaction price may need to be disclosed
IFRS 15.116, 118(b) To disclose the amount of revenue recognised in the current period that relates
to performance obligations that were satisfied (or partially satisfied) in a prior
period, as well as cumulative catch-up adjustments to revenue that affect the
corresponding contract asset or contract liability, an entity may need to track
separately the effects of changes in the transaction price.
For example, Manufacturer M enters into a contract containing a single
performance obligation that is satisfied over time. The contract price includes
5,000 fixed consideration plus up to 1,000 variable consideration based on
manufacturing targets.
At the end of Year 1, the contract is 35% complete and M estimates that total
variable consideration will be 200. At the end of Year 2, the contract is 90%
complete and M estimates that total variable consideration will be 1,000.
M therefore recognises revenue as follows.
Fixed Variable
consideration consideration Total
At end of Year 1 (contract 35%

complete)
Estimated transaction price 5,000 200 5,200
Revenue recognised in Year 1 (35%) 1,750 70 1,820
At end of Year 2 (contract 90%

complete)
Estimated transaction price 5,000 1,000 6,000
Cumulative revenue to end of Year 2
as contract is 90% complete 4,500 900 5,400
Less revenue recognised in Year 1 (1,750) (70) (1,820)
Revenue recognised in Year 2 2,750 830 3,580
In the financial statements for Year 2, M discloses the amount of revenue

recognised in Year 2 as a result of the change in the transaction price. Because
the transaction price increased by 800 (1,000 - 200) and the contract was
35% complete at the end of Year 1, the amount to be disclosed as revenue
recognised in the reporting period from a performance obligation partially
satisfied in a previous period is 280 (800 × 35%).
12.1.3 Performance obligations

IFRS 15.119–120 An entity provides the following information about its performance obligations:
– when the entity typically satisfies its performance obligations: e.g. on shipment,
on delivery, as services are rendered or on completion of service;
– significant payment terms: e.g. whether the contract has a significant financing
component, the consideration is variable and the variable consideration is
constrained;
– the nature of the goods or services that it has promised to transfer, highlighting
any performance obligations to arrange for another party to transfer goods or
services (if the entity is acting as an agent);
– obligations for returns, refunds and other similar obligations;
– types of warranties and related obligations; and
– the aggregate amount of the transaction price allocated to performance
obligations that are unsatisfied (or partially unsatisfied) at the reporting date.
The entity also provides either a quantitative (using time bands) or a qualitative
explanation of when it expects that amount to be recognised as revenue.
IFRS 15.121 As a practical expedient, an entity is not required to disclose the transaction price
allocated to unsatisfied (or partially unsatisfied) performance obligations if:
– the contract has an original expected duration of one year or less;
– the entity applies the practical expedient to recognise revenue at the amount
to which it has a right to invoice, which corresponds directly to the value to the
customer of the entity’s performance completed to date – e.g. a service contract
in which the entity bills a fixed hourly amount (see 5.3.1).
IFRS 15.122 The entity also discloses whether it is applying the practical expedient and whether
any consideration from contracts with customers is not included in the transaction
price – e.g. whether the amount is constrained and therefore not included in
the disclosure.
12 Disclosure | 323
Remaining performance obligation disclosures may differ from

backlog disclosures
IFRS 15.BC349 Some entities, including those with long-term contracts, publicly disclose
bookings or backlogs (i.e. contracts received but incomplete or not yet started).
Bookings are typically a metric defined by management to facilitate discussions
with investors and, under some local regulations, ‘backlog’ may be subject to
legal interpretation.
The disclosure about remaining performance obligations is based on the
determination of the transaction price for unsatisfied (or partially unsatisfied)
performance obligations and therefore it may differ from the disclosure of
bookings or backlog – e.g. because it does not include orders for which neither
party has performed and each party has the unilateral right to terminate a wholly
unperformed contract without compensating the other party.
Contract renewals are included only if they provide a material

right
The standard requires passive and active renewals to be accounted for in the
same way, because the customer is making the same economic decision. For
example, a one-year service contract with an option to renew for an additional
year at the end of the initial term is economically the same as a two-year service
contract that allows the customer to cancel the contract at the end of the first
year without penalty and avoid payment for the second year.
Contracts with passive or active renewals that do not give the customer a
material right are not included in the disclosure of remaining performance
obligations, but a one-year contract with a renewal period that is a material
right is included to the extent of the material right. Similarly, a two-year contract
that provides the customer with a cancellation provision after the first year is
included in the disclosure of remaining performance obligations if the second
year of the contract provides the customer with a material right.
Certain contracts can be excluded from remaining performance

obligation disclosures
The practical expedient allows an entity to exclude from the remaining

performance obligations disclosure contracts that have an original expected
duration of one year or less. However, an entity is not precluded from including
all contracts in the disclosure.
Constrained transaction price is used in the remaining

performance obligation disclosures
The transaction price used in the remaining performance obligations disclosure

is the constrained amount. An entity also explains qualitatively whether any
consideration is not included in the transaction price – e.g. constrained variable
consideration – and, therefore, is not included in the remaining performance
obligations disclosure.
12.1.4 Significant judgements when applying the standard

IFRS 15.123 An entity discloses the judgements and changes in judgements made in applying
the standard that affect the determination of the amount and timing of revenue
recognition – specifically, those judgements used to determine whether an entity
acts as a principal or an agent, the timing of the satisfaction of performance
obligations, the transaction price and amounts allocated to performance obligations.
IFRS 15.124 For performance obligations that are satisfied over time, an entity describes the
method used to recognise revenue – e.g. a description of the output or input
method and how those methods are applied – and why the methods are a faithful
depiction of the transfer of goods or services.
IFRS 15.125 For performance obligations that are satisfied at a point in time, the standard
requires a disclosure about the significant judgements made to evaluate when the
customer obtains control of the promised goods or services.
IFRS 15.126 An entity also discloses information about the methods, inputs and assumptions
used to:
– determine the transaction price, which includes estimating variable
consideration, assessing whether the variable consideration is constrained,
adjusting the consideration for a significant financing component and measuring
non-cash consideration;
– allocate the transaction price, including estimating the stand-alone selling
prices of promised goods or services and allocating discounts and variable
consideration; and
– measure obligations for returns and refunds and other similar obligations.
Greater specificity in the revenue standard
IFRS 15.BC355 IFRS has general requirements on disclosing an entity’s significant accounting
estimates and judgements, but the revenue standard provides specific areas for
which disclosures are required about the estimates used and judgements made
in determining the amount and timing of revenue recognition.
12 Disclosure | 325
12.2 Interim disclosures |
12.1.5 Assets recognised for costs to obtain or fulfil a contract

with a customer
IFRS 15.127–128 An entity discloses the closing balance of assets that are recognised from the
costs incurred to obtain or fulfil a contract with a customer, separating them by
their main category – e.g. acquisition costs, pre-contract costs, set-up costs
and other fulfilment costs – and the amount of amortisation and any impairment
losses recognised in the reporting period. An entity describes the judgements
made in determining the amount of the costs incurred to obtain or fulfil a contract
with a customer and the method used to determine the amortisation for each
reporting period.
12.2 Interim disclosures

IAS 34.16A(g) IFRS requires entities to include information about disaggregated revenue in their
interim financial reporting.
Extent of interim revenue disclosures requires judgement
IAS 1.17(c), 34.15–15C, 16A(l) The interim reporting standard includes only one explicit requirement related
to revenue from contracts with customers – i.e. to provide information about
disaggregated revenue. However, to meet other requirements in the interim
reporting standard – e.g. to provide an explanation of events and transactions
that are significant to an understanding of the changes in the entity’s financial
position and performance since the most recent annual reporting period – other
revenue disclosures in addition to disaggregated information may be relevant.
An entity considers its specific facts and circumstances, including guidance
provided by a local regulator, and exercises judgement in determining the extent
of additional revenue disclosures in the interim period.
13 Effective date and

transition
Overview
IFRS 15.C1 The standard is effective for annual periods beginning on or after 1 January
2018. Early adoption was permitted.
IFRS 15.C3 An entity may make the transition to the standard using one of two methods.
– Apply the standard retrospectively (with optional practical expedients)
and record the effect of applying the standard at the start of the earliest
presented comparative period.
– Apply the standard to open contracts at the date of initial application and
record the effect of applying the standard at that date. The comparative
periods presented are not restated.
The examples used to illustrate the application of the transition methods in

this section reflect a calendar year-end entity that applies the standard as of
1 January 2018. Some examples include two years of comparative financial
statements.
For additional examples on applying the transition methods, see our publication
Transition to the new revenue standard.
For examples of transition disclosures, see our Guide to annual financial
statements – IFRS 15 Revenue supplement.
13.1 Transition
IFRS 15.C3 An entity can apply the standard to all of its contracts with customers using either:
– the retrospective method (see Section 13.2); or
– the cumulative effect method (see Section 13.3).
13 Effective date and transition | 327
13.1 Transition |
IFRS 15.C2 For the purposes of transition:

– the ‘date of initial application’ is the start of the reporting period in which an entity
first applies the standard. For an entity with a calendar year end applying the
standard for the first time as of the mandatory effective date, the date of initial
application would be 1 January 2018; and
– a contract is a ‘completed contract’ if all of the goods or services identified
in accordance with IAS 11, IAS 18 and related interpretations that the entity
has an obligation to deliver and the customer has a right to receive have been
transferred before the date of initial application. It appears that the assessment
of whether a contract is complete should take into account the entity’s existing
stated accounting policies.
IFRS 15.BC445E It appears that if on initial application an entity has a deferred balance related to a
completed contract, then it should continue to account for it in accordance with its
existing accounting policy after the date of initial application.
Example 1 – Transition: Deferred balance relating to a completed

contract
In 2017, Company C enters into a framework agreement with Customer B to

supply widgets. The framework agreement specifies the following volume-
based tiered pricing:
– 1–2,000 items: 5 per item; and
– over 2,000 items: 4 per item.
There is no stated minimum purchase quantity. Before 31 December 2017,
B orders and C delivers 1,800 items.
Applying the previous requirements, C estimates that B’s total expected
purchases under this framework agreement will be 2,500 items – i.e. B will
qualify for the discount. Therefore, C recognises revenue based on the total
expected purchases at the average price per item of 4.8 ((5 × 2,000 + 4 × 500) /
2,500). As a result, C recognises 360 ((5 - 4.8) × 1,800) as deferred revenue in its
statement of financial position at 31 December 2017.
C applies the new standard in the reporting period beginning on 1 January 2018
using the cumulative effect method. C determines that each purchase order
under the framework agreement is a separate contract and the orders fulfilled
constitute completed contracts at 1 January 2018 because all of the items
ordered were delivered under the previous requirements.
We believe that C should continue to account for the deferred revenue of 360 in
accordance with its existing accounting policy – i.e. to recognise it as revenue
when it grants discounts to B on subsequent sales.
13.2 Retrospective method

IFRS 15.C2(a), C3(a) Under the retrospective method, an entity is required to restate each period before
the date of initial application that is presented in the financial statements. The ‘date
of initial application’ is the start of the reporting period in which an entity first applies
the standard. For example, if an entity first applies the standard in its financial
statements for the year ended 31 December 2018, then the date of initial application
is 1 January 2018. The entity recognises the cumulative effect of applying the
standard in equity (generally, retained earnings or net assets) at the start of the
earliest comparative period presented.
IFRS 15.C5 An entity that elects to apply the standard using the retrospective method
can choose to do so on a full retrospective basis or with one or more practical
expedients. The practical expedients provide relief from applying the requirements
of the standard to certain types of contracts in the comparative periods presented.
IFRS 15.C5 There are four optional practical expedients available to an entity that applies the
retrospective method.
Practical expedient Description
Practical expedient 1 For completed contracts, an entity need not restate

(see 13.2.1) contracts that:
– begin and end in the same annual reporting
period; or
– are completed contracts at the beginning of the
earliest period presented.
Practical expedient 2 For completed contracts that have variable

(see 13.2.2) consideration, an entity may use the transaction
price at the date on which the contract was
completed, rather than estimating the variable
consideration amounts in each comparative
reporting period.
Practical expedient 3 For modified contracts, an entity need not

(see 13.2.3) separately evaluate the effects of each of the
contract modifications before the beginning of the
earliest period presented.
Instead, an entity may reflect the aggregate effect
of all of the modifications that occur before the
beginning of the earliest period presented in:
– determining the transaction price;
– identifying the satisfied and unsatisfied
performance obligations; and
– allocating the transaction price to the
13.2 Retrospective method |
Practical expedient Description
Practical expedient 4 For all periods presented before the date of initial
(see 13.2.4) application, an entity need not disclose the amount
of the transaction price allocated to remaining
performance obligations, nor an explanation of when
it expects to recognise that amount as revenue.
IFRS 15.C6 If an entity applies one or more practical expedients, then it needs to do so
consistently for all goods or services for all periods presented. In addition, the entity
discloses the following information:
– the expedients that have been used; and
– a qualitative assessment of the estimated effect of applying each of these
expedients, to the extent reasonably possible.
IFRS 15.C4 An entity is also required to comply with disclosure requirements for a change in
accounting policy, including the amount of the adjustment to the financial statement
line items and earnings per share amounts affected. However, an entity that adopts
the standard retrospectively is not required to disclose the impact of the change
in accounting policy on the financial statement line items and earnings per share
amounts for the year of initial application.
Example 2 – Full retrospective method
Software Company Y enters into a contract with a customer to provide a

software term licence and telephone support for two years for a fixed amount of
400. The software is delivered and operational on 1 July 2016. Y adopts the new
revenue standard on 1 January 2018 and presents two years of comparatives.
Under the previous requirements, Y recognises revenue for the arrangement on
a straight-line basis over the 24-month contract term, beginning on 1 July 2016.
Under the new standard, Y determines that the contract consists of two
performance obligations: the software licence and the telephone support. Y
allocates 300 of the transaction price to the software licence and 100 to the
telephone support.
Y determines that the telephone support is a performance obligation satisfied

over time and its progress is best depicted by time elapsed data: 2016: 25, 2017:
50 and 2018: 25. The software licence is a point-in-time performance obligation
and the 300 is recognised as revenue on the delivery date of 1 July 2016.
Y elects to adopt the new standard retrospectively and presents the following
amounts.
2016 2017 2018
Revenue 3251 50 25
Note
1. Calculated as 300 for the software licence plus 25 for the telephone support.
Y does not need to make an opening adjustment to equity at 1 January 2016

because the contract began on 1 July 2016.
Y also considers the effect of the change in revenue recognition on related cost
balances and makes appropriate adjustments.
All contracts (open and closed) under previous requirements

require consideration
If an entity applies the new standard on a full retrospective basis, then all
contracts with customers are potentially open – even if they are considered
closed under the previous requirements.
For example, entities with contracts that included after-sale services accounted
for as sales incentives are required to re-analyse those contracts to:
– determine whether the after-sale service is a performance obligation under
the new standard; and
– assess whether any performance obligations identified have been satisfied.
Cost and income tax line items may also require adjustment
When making adjustments, the entity may also be required to adjust some
cost and income tax balances in the financial statements if they are affected
by the new requirements. For example, the entity is required under the new
standard to capitalise and amortise the costs of acquiring a contract, but under
previous requirements it had expensed those costs as they were incurred.
The capitalisation of costs under the new standard may create temporary
differences or affect other judgements and therefore impact deferred
tax balances.
Regulatory requirements need to be considered
Entities that elect the retrospective method may also need to consider the
effect on any additional historical data that forms part of, or accompanies, the
financial statements or that is filed in accordance with regulatory requirements.
13.2.1 Practical expedient 1 – Contracts that are started and

completed in the same annual reporting period
IFRS 15.C5(a) Under practical expedient 1, an entity need not restate completed contracts that:
– begin and end within the same annual reporting period; or
– are completed contracts at the beginning of the earliest period presented.
Definition of a completed contract

IFRS 15.C2(b) A ‘completed’ contract is one for which the entity has transferred all of the goods
or services identified under the previous revenue requirements, including the
standards on construction contracts and revenue, and related interpretations.
Example 3 – Applying practical expedient 1: Multiple contracts
Contract Manufacturer X has the following contracts with customers, each of

which runs for eight months.
Contract Starts Completes
1 1 January 2017 31 August 2017

2 1 July 2016 28 February 2017
3 1 July 2017 28 February 2018
Contract timelines
Comparative years Current year
Contract 1
Contract 2
Contract 3
1 January 2016 31 December 2016 31 December 2017 31 December 2018
X determines that practical expedient 1:

– applies to Contract 1, because Contract 1 begins and ends in an annual
reporting period before the date of initial application;
– does not apply to Contract 2, because it is not completed within a single
annual reporting period; and
– does not apply to Contract 3, because Contract 3 is not completed under
previous requirements by the date of initial application.
Example 4 – Applying practical expedient 1: Comparative period
Engineering Company E enters into a contract with Customer C to build a

specialised asset for fixed consideration of 100,000, which begins on 1 August
2017 and is completed in November 2017.
Under previous requirements, E recognised revenue on the date of delivery.
Comparatives Current year Total

2016 2017 2018
Revenue - 100,000 - 100,000
Under the new standard, E determines that control is transferred over time and
revenue is therefore recognised over time using the cost-to-cost method.
Comparatives Current year Total

2016 2017 2018
Revenue - 100,000 - 100,000
The contract begins and ends in the same annual period – i.e. 2017 – so revenue
amounts for 2018 are not impacted but practical expedient 1 is relevant.
– If Company E elects this practical expedient, then it does not have to analyse
the contract under the new standard.
– In contrast, if E does not elect the practical expedient then it restates its
interim results for the comparative period (i.e. 2017) to reflect the accounting
required under the new standard (i.e. over-time revenue recognition).
Relief provided by practical expedient 1
This practical expedient might seem to be of limited benefit, because any

adjustments are made in the same period as the contract is started and
completed. Therefore, revenue for the annual period is not affected. However, it
can provide relief for some types of transactions – e.g. when:
– additional performance obligations are identified in a contract under the new
standard, as compared with previous requirements – e.g. some car sales in
which the manufacturer provides a free service to the end purchaser of a car
and treats it as a sales incentive under previous requirements;
– a contract that was treated as a point-in-time transaction under previous
requirements is treated as an over-time obligation under the new standard –
e.g. some construction contracts for apartment sales; and
– a contract begins and ends in the same annual reporting period, but spans
one or more interim periods (although in these situations the entity will also
need to consider the importance of comparability from one interim period
to another).
13.2.2 Practical expedient 2 – Exemption from applying variable

consideration requirements
IFRS 15.C5(b) Under practical expedient 2, an entity may use the transaction price at the date on
which the contract was completed, rather than estimating the variable consideration
amounts in each comparative reporting period.
Example 5 – Applying practical expedient 2: Returned products
Manufacturer X enters into a contract to sell 1,000 products to Customer Y on

1 September 2016. X also grants Y the right to return any unused product within
120 days. In November 2016, Y returns 200 unused products.
X considers the application of practical expedient 2 to its contract and
determines that it can use the final transaction price for the contract. Therefore,
X recognises revenue for 800 products (being 1,000 products delivered less
200 products returned) on 1 September 2016, rather than estimating the
consideration under Step 3 of the model, because the contract was completed
before the date of initial application.
Example 6 – Applying practical expedient 2: Performance-based fee
Investment Management Company T entered into a 12-month contract to

manage Fund F’s assets on 1 July 2016. At the end of the contract, T was
entitled to a performance-based incentive fee of 20% of the fund’s cumulative
return in excess of an observable market index. When the contract was
completed on 30 June 2017, T received an incentive fee of 100,000.
Under the new standard, T concludes that it cannot include these types of
incentives in the transaction price before the contract is completed, because
they are highly susceptible to volatility in the market and are therefore subject to
the variable consideration constraint (see 3.1.2).
The contract was completed before the date of initial application of the new
standard of 1 January 2018. T elects to apply the standard retrospectively. T also
chooses to apply practical expedient 2 and includes the incentive fee of 100,000
in the transaction price, recognising it as revenue over the contract period.
Without the application of this practical expedient, T would recognise the entire
fee on completion of the contract – i.e. on 30 June 2017.
Limited hindsight allowed
IFRS 15.BC437 Practical expedient 2 only exempts an entity from applying the requirements
on variable consideration, including the constraint in Step 3 of the model. The
entity is still required to apply all other aspects of the model when recognising
revenue for the contract.
By allowing the use of hindsight in estimating variable consideration, this
practical expedient eliminates the need to:
– determine what the estimated transaction price would have been at the end
of each comparative reporting period; and therefore
– collect the information necessary to estimate the transaction price at the end
of those periods.
Use of the practical expedient may bring forward revenue

recognition
The use of this practical expedient will accelerate revenue recognition in

many circumstances as compared with the full retrospective approach if the
constraint in Step 3 of the model would otherwise have applied. This is because
the final transaction price is used from inception of the contract.
13.2.3 Practical expedient 3 – Contract modifications before the

earliest period presented
IFRS 15.C5(c) Under practical expedient 3, an entity need not separately evaluate the effects
of contract modifications before the beginning of the earliest reporting period
presented using the contract modifications requirements in the standard.
Instead, an entity may reflect the aggregate effect of all of the modifications that
occur before the beginning of the earliest period presented in:
– identifying the satisfied and unsatisfied performance obligations;
– determining the transaction price; and
– allocating the transaction price to the satisfied and unsatisfied performance
obligations.
Example 7 – Applying practical expedient 3
Manufacturer M entered into a contract with Customer C to manufacture, sell

and service a complex piece of machinery, which began on 1 April 2014 for
a fixed amount of consideration of 2 million. The contract is expected to be
completed by 31 December 2018.
Before the start of the earliest period presented – i.e. 1 January 2017 – the
contract was modified numerous times, changing both the scope of work
and the amount of consideration. All of these modifications were agreed and
approved before 31 December 2016.
At 1 January 2017, M determines that the modified contract includes two

performance obligations under the new standard:
– the item of machinery, the specification of which has been modified since
contract inception; and
– repair and maintenance services.
The modified amount of consideration is:
– a fixed amount of 3 million; and
– an additional amount of up to 200,000 if certain production levels are
attained.
If M does not elect to apply practical expedient 3, then it assesses each contract
modification separately and accounts for each under the guidance on contract
modifications (see Section 8.2). Under this approach, M starts by treating the
contract as a single performance obligation for a fixed amount of 2 million
and then it applies the contract modification guidance to account for each
modification to the contract up to 1 January 2017.
Conversely, if M elects to use practical expedient 3 then it does not separately
evaluate the effects of each modification before the start of the earliest period
presented. Instead, it considers the aggregate effect of all modifications – i.e.
the contract as modified for scope and price as of 1 January 2017. Under this
approach, as of 1 January 2017 M determines the transaction price, identifies
the performance obligations in the contract (both satisfied and unsatisfied)
and allocates the transaction price to the performance obligations. However,
it applies the contract modification guidance to account for each contract
modification (if there are any) that occurs after 1 January 2017.
Exemption from restating for contract modifications that occur

before the start of the earliest period presented
This practical expedient essentially allows an entity to use hindsight when

assessing the effect of a modification on a contract. However, it does not
exempt an entity from applying other aspects of the requirements to a contract
– e.g. identifying the performance obligations in the contract and measuring the
progress towards complete satisfaction of those performance obligations.
13.2.4 Practical expedient 4 – Disclosure exemption

IFRS 15.C5(d) Under practical expedient 4, an entity need not disclose for reporting periods
presented before the date of initial application:
– the amount of the transaction price allocated to the remaining performance
obligations; nor
– an explanation of when the entity expects to recognise that amount as revenue.
Example 8 – Applying practical expedient 4
Property Developer X has a contract with Customer C, to construct a building on

C’s land for a fixed amount of 20 million. Construction starts on 1 January 2016
and is expected to take five years to complete. X determines that it satisfies
its performance obligation over time and that the cost-to-cost method best
depicts performance.
IFRS 15.120 If X elects to apply the retrospective method including practical expedient 4,
then its annual financial statements for the year ended 31 December 2018 are
not required to comply with the remaining performance obligation disclosure
requirements for the comparative periods presented (31 December 2017 and
31 December 2016).
Assume that the building is 80% complete on 31 December 2018. X provides
the following disclosure.
Transaction price allocated to remaining performance obligations

At 31 December 2018, X has yet to recognise as revenue 4 million of the
20 million transaction price for the construction of the building. X expects to
recognise this amount evenly over the next two years in line with the planned
schedule for completion of its construction.
Using the transition requirements of the standard, X has elected not
to provide information on the transaction price allocated to remaining
performance obligations at 31 December 2017 and 31 December 2016.
13.3 Cumulative effect method |
Disclosure relief only
This expedient is a disclosure exemption only – it does not grant an entity

any relief from applying the requirements of the standard to its contracts
retrospectively, subject to the use of other practical expedients.
13.3 Cumulative effect method

IFRS 15.C3(b), C7A Under the cumulative effect method, an entity applies the new standard as of the
date of initial application, without restating comparative period amounts. The entity
records the cumulative effect of initially applying the new standard – which may
affect revenue and costs – as an adjustment to the opening balance of equity at the
date of initial application.
Under the cumulative effect method, an entity can choose to apply the
requirements of the standard to:
– only contracts that are not completed contracts at the date of initial application; or
– all contracts at the date of initial application.
An entity that applies the cumulative effect method may also use the contract
modifications practical expedient (see 13.2.3).
An entity can choose to apply the practical expedient to all contract modifications
that occur before either the:
– beginning of the earliest period presented; or
– date of initial application.
IFRS 15.C8 An entity that elects the cumulative effect transition method is also required to
disclose the following information:
– the amount by which each financial statement line item is affected in the current
period as a result of applying the new standard; and
– an explanation of the significant changes between the reported results under the
new standard and those under previous requirements.
Example 9 – Cumulative effect method
Modifying Example 2 in this chapter, Software Company Y decides to apply the

cumulative effect method, with the following consequences.
– Y does not adjust the comparative periods, but records an adjustment to
opening equity at the date of initial application (1 January 2018) for the
additional revenue related to 2016 and 2017 that would have been recognised
if the new standard had applied to those periods.
– Y also considers the effects of the revenue adjustments on related cost
balances and adjusts them.
– Y discloses the amount by which each financial statement line item is affected
in the current period as a result of applying the new standard.
The revenue amounts presented in Y’s financial statements are as follows.
Contract 2016 2017 2018
Revenue 1001 2001 25

Adjustment to opening equity - - 752
Notes
1. Amounts are not restated and represent the amounts recognised under previous
requirements for those periods.
2. Calculated as 300 for the software licence plus 75 for the telephone support (for 2016 and
2017) minus 300 recognised under previous requirements (being 400 × 18 / 24).
Example 10 – Cumulative effective method: Sale with right of

return
Drinks Company W enters into a contract to sell 100 items of Product P to

Customer C. C has a right to return the products within one month of delivery if
they are not satisfactory. The products are delivered on 15 December 2017 and
C returns 20 of them on 15 January 2018.
W has elected to transition to the new standard using the cumulative effect
method and has elected to apply the completed contracts practical expedient.
W’s date of initial application is 1 January 2018.
This is a completed contract at 31 December 2017 because W has transferred
all of the goods identified under the previous requirements before that date.
Because the contract is a completed contract, W accounts for the transaction in
accordance with its existing accounting policy for a sale with a right of return.
13.3 Cumulative effect method |
Example 11 – Cumulative effective method: Rebate arrangement
Food Company F enters into a supply agreement with Customer S under which
S receives a tiered-volume rebate depending on the number of purchases that
it makes in a two-year period. The agreement includes no minimum purchase
quantities. F has elected to transition to the new standard using the cumulative
effect method and has elected to apply the completed contracts practical
expedient. F’s date of initial application is 1 January 2018.
This is a completed contract for all goods delivered to S up to 31 December
2017 because F has transferred all of the goods or services identified under the
previous requirements.
This conclusion applies regardless of whether the rebate arrangement is applied
to purchases on a prospective or retrospective basis, because the definition
focuses on the transfer of the goods identified and not the completion of the
accounting for the transaction.
Because the contract is a completed contract, F accounts for the transaction
in accordance with its existing accounting policy. However, any purchases
made from 1 January 2018 onwards are accounted for in accordance with the
new standard.
Example 12 – Cumulative effective method: Incomplete contract
Retailer R has a customer loyalty programme that allows customers to

accumulate redeemable points for each purchase that they make.
R has elected to transition to the new standard using the cumulative effect
method and has elected to apply the completed contracts practical expedient.
R’s date of initial application is 1 January 2018.
The contracts for the sales of goods, including loyalty points, are not completed
contracts as at 31 December 2017. R has not transferred all of the goods
and services identified under the previous requirements, because there are
unredeemed points at 31 December 2017.
Because the contracts are not completed contracts, R is required to apply
the new standard to its customer loyalty programme and record any required
adjustments at the date of transition of 1 January 2018.
Dual reporting still required
IFRS 15.C8 An entity electing the cumulative effect method will still be required to maintain
dual reporting for the year of initial application of the new standard to disclose
the effect of adoption on line items in the statements of financial position,
comprehensive income and cash flows because of the requirement to disclose
the difference between:
– revenue and costs that would have been recognised under previous
requirements in the current period; and
– the amounts that are recognised under the new standard.
Cumulative effect method reduces comparability
The cumulative effect method automatically reduces comparability, because

an entity does not restate its comparatives. However, if an entity chooses to
apply this method to all contracts rather than just to open contracts, then the
accounting result in the current period is similar to applying the full retrospective
method. Although it does not provide the same level of comparability in the
first set of financial statements as the retrospective method, it does result in a
consistent starting point for all contracts held by an entity.
The outcome of applying the revenue standard only to incomplete contracts
at the date of initial application under the cumulative effect method is similar
to applying practical expedient 1 under the retrospective approach – i.e. not to
restate contracts that are completed contracts at the beginning of the earliest
period presented – except that the comparative periods would also be restated
under the latter approach.
Choosing to apply the cumulative effect method to all contracts

may improve comparability
IFRS 15.BC445J–BC445L If an entity elects to apply the cumulative effect method to all contracts, rather
than only those not completed at the date of initial application, then this may
result in financial information for the current reporting period that is more
comparable with that of entities following the retrospective method.
13.4 Consequential amendments to other IFRS requirements |
Contract modification practical expedient simplifies

implementation but reduces comparability
The contract modifications practical expedient allows the entity to avoid

accounting for each contract modification separately, which may significantly
reduce the burden of applying the new standard to existing contracts. However,
it also means that those contracts are not fully compliant with the new
standard, which may reduce comparability in the current and in future years for
contracts with a long duration.
The impact of applying this practical expedient is similar under the retrospective
and cumulative effect methods.
13.4 Consequential amendments to other IFRS

requirements
The new revenue standard introduces consequential amendments to several
other standards. For example, it amends the intangible assets standard such that
the amount of consideration to be used in calculating the gain or loss on disposal
of an intangible asset is determined under the requirements for determining the
transaction price in the revenue standard. A question arises over how to apply
the consequential amendments to other standards on transition to the new
revenue standard.
It appears that it would be appropriate to apply consequential amendments in a
manner that is consistent with the transition method chosen for the new revenue
standard – i.e. retrospective or cumulative effect method. However, it may also be
acceptable to apply consequential amendments to other standards retrospectively
under the general requirements.
Example 13 – Consequential amendments
Miner X holds a licence to explore a site (mining tenement) in Country Z and

accounts for it as an intangible asset. In 2005, X sells the mining tenement to
Miner Y. Under the agreement, X receives a royalty calculated as 5% of Y’s sales
of product mined from the area covered by the mining tenement.
X applies the new standard from 1 January 2018 and presents one year of
comparatives in its financial statements.
Under the previous requirements, X recognised this royalty as Y’s sales
occurred. X determines that under the new revenue standard, this royalty
represents variable consideration – i.e. the exception for sales-based
royalties does not apply because it is not a licence of intellectual property. X
estimates that if it applied the variable consideration guidance to the royalty
on a retrospective basis, then it would recognise a contract asset of 100 on
1 January 2017.
We believe that it would be appropriate for X to apply the same transition

approach to its analysis of the disposal of the mining tenement as it does to
apply the new revenue standard. For example, if X elects to transition to the
new revenue standard using the cumulative effect method and has also elected
to apply the completed contract exemption, then it accounts for the royalty in
accordance with its existing accounting policy – i.e. as Y’s sales occur.
Alternatively, we believe that X could apply the consequential amendments to
the intangible assets standard on a retrospective basis and recognise a contract
asset of 100 at the start of the earliest comparative period presented (i.e.
1 January 2017) and a corresponding credit to retained earnings.
13.5 First-time adoption

IFRS 1.D34–D35 A first-time adopter of IFRS may adopt the revenue standard when it adopts IFRS.
It is not required to restate contracts that were completed1 before the date of
transition to IFRS – i.e. the earliest period presented.
A first-time adopter may apply the practical expedients available to an entity
already applying IFRS that elects the retrospective method. In doing so, it
interprets references to the ‘date of initial application’ as the beginning of its first
IFRS reporting period. If a first-time adopter decides to apply any of the practical
expedients, then it discloses:
– the expedients that have been used; and
– a qualitative assessment of the estimated effect of applying each of those
expedients, to the extent reasonably possible.
Timeline for a first-time adopter

Date of equity Date of initial

adjustment application
Previous GAAP
IFRS 15
(only contracts open
(except to the
under previous
extent of any IFRS 15
GAAP at
practical expedients
1 January 2016
elected)
are restated)
Comparative year Current year

1
1 January 2017 31 December 2017 31 December 2018
Note
1. Date of transition to IFRS.
1. For a first-time adopter, a completed contract is a contract for which the entity has transferred
all of the goods or services identified under previous GAAP.
13.5 First-time adoption |
Example 14 – First-time adopter of IFRS
Carmaker M applies IFRS for the first time in its annual financial statements
for the year ended 31 December 2018. M presents one year of comparative
information in its financial statements and therefore its date of transition to IFRS
is 1 January 2017.
M sells cars to dealers with a promise to provide one free maintenance service
to the end purchaser of a car.
Under previous GAAP, M treats the free servicing component of the
arrangement as a sales incentive, recognising a provision with a corresponding
expense when the vehicle is sold to the dealer. In addition, it recognises
revenue at the invoice price when the car is delivered to the dealer.
Under the standard, M determines that the arrangement consists of
two performance obligations – the sale of the car and a right to one free
maintenance service. This treatment results in a different pattern of revenue
recognition from previous GAAP, because a portion of the transaction price
is allocated to the free service and recognised as the performance obligation
is satisfied.
If M elects to apply the standard only to contracts that are not completed under
previous GAAP at the date of transition to IFRS, then it applies the standard to
its contracts for the sales of cars as follows.
– M makes no opening adjustments at the date of transition for contracts
relating to cars that have already been delivered to the dealer, because a first-
time adopter is not required to analyse contracts that are completed under
previous GAAP before the date of transition. This is because the cars have
all been delivered and the free services are not considered to be part of the
revenue transaction under previous GAAP.
– If M elects to apply practical expedient 1, then it does not restate the

comparative period because the car sales were recognised as point-in-time
sales under previous GAAP.
– If M does not elect to apply practical expedient 1, then it restates sales in the
comparative period for the effect of allocating the transaction price between
the car and the free maintenance service.
– The approach elected for 2017 comparatives does not impact revenue for
2018. M applies the new standard to all cars sold on or after 1 January 2018.
An IFRS entity could achieve the outcome described above for a first-time
adopter in two ways:
– electing a practical expedient and therefore not restating contracts that are
started and completed in the same annual reporting period before the date of
initial application; or
– electing to apply the cumulative effect method.
Guidance referenced
Standards are referred to in this handbook by their topic – e.g. references to ‘the
financial instruments standard’ are to IFRS 9.
Guidance referenced in this handbook
The Conceptual Framework for Financial Reporting

IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 14 Regulatory Deferral Accounts
IFRS 15 Revenue from Contracts with Customers
IFRS 16 Leases
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 16 Property, Plant and Equipment
IAS 24 Related Party Disclosures
IAS 28 Investments in Associates and Joint Ventures
IAS 32 Financial Instruments: Presentation
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 40 Investment Property
IFRIC 12 Service Concession Arrangements
IU MM-YY IFRIC Update month year
Detailed contents | 345
Detailed contents
Facing new challenges..................................................................................................................................................... 1
Overview........................................................................................................................................................................... 2
Organisation of the text............................................................................................................................................................. 2
1 Step 1 – Identify the contract with a customer..................................................................................................... 3

1.1 Criteria to determine whether a contract exists............................................................................................................ 3
1.1.1 Framework agreements.......................................................................................................................................11
1.2 Contract term................................................................................................................................................................. 14
1.3 Consideration received before a contract exists.......................................................................................................... 17
1.4 Combination of contracts.............................................................................................................................................. 19
2 Step 2 – Identify the performance obligations in the contract.......................................................................... 23

2.1 Distinct goods or services............................................................................................................................................. 24
2.2 Implied promises and administrative tasks................................................................................................................. 35
2.3 Series of distinct goods or services.............................................................................................................................. 39
3 Step 3 – Determine the transaction price............................................................................................................ 46

3.1 Variable consideration (and the constraint)................................................................................................................. 47
3.1.1 Estimate the amount of variable consideration.................................................................................................... 52
3.1.2 Determine the amount for which it is highly probable that a significant reversal will not occur (‘the constraint’)..... 57
3.2 Significant financing component................................................................................................................................. 63
3.3 Non-cash consideration................................................................................................................................................ 78
3.4 Consideration payable to a customer........................................................................................................................... 81
3.5 Sales taxes...................................................................................................................................................................... 88
4 Step 4 – Allocate the transaction price to the performance obligations in the contract.................................. 90
4.1 Determine stand-alone selling prices........................................................................................................................... 91
4.1.1 Estimating stand-alone selling prices.................................................................................................................. 92
4.1.2 Using the residual approach to estimate stand-alone selling prices..................................................................... 95
4.2 Allocate the transaction price....................................................................................................................................... 98
4.2.1 Allocating a discount..........................................................................................................................................101
4.2.2 Allocating variable consideration....................................................................................................................... 105
4.3 Changes in the transaction price.................................................................................................................................111
5 Step 5 – Recognise revenue when or as the entity satisfies a performance obligation..................................113

5.1 Transfer of control.........................................................................................................................................................114
5.2 Performance obligations satisfied over time..............................................................................................................115
5.2.1 Performance does not create an asset with an alternative use...........................................................................118
5.2.2 The entity has an enforceable right to payment for performance completed to date......................................... 121
5.3 Measuring progress towards complete satisfaction of a performance obligation.................................................. 131

5.3.1 Selecting a method to measure progress.......................................................................................................... 131
5.3.2 Limitations on applying the units-of-delivery or units-of-production methods................................................... 139
5.3.3 Adjusting the measure of progress................................................................................................................... 141
5.3.4 As-invoiced practical expedient......................................................................................................................... 143
5.4 Performance obligations satisfied at a point in time................................................................................................. 148
5.5 Repurchase agreements.............................................................................................................................................. 151
5.6 Consignment arrangements....................................................................................................................................... 156
5.7 Bill-and-hold arrangements........................................................................................................................................ 159
5.8 Customer acceptance.................................................................................................................................................. 161
6 Scope................................................................................................................................................................... 162
6.1 In scope......................................................................................................................................................................... 162
6.2 Out of scope................................................................................................................................................................. 163
6.3 Partially in scope.......................................................................................................................................................... 165
6.4 Portfolio approach........................................................................................................................................................ 171
7 Contract costs..................................................................................................................................................... 173

7.1 Costs of obtaining a contract...................................................................................................................................... 173
7.2 Costs of fulfilling a contract........................................................................................................................................ 179
7.3 Amortisation................................................................................................................................................................ 187
7.4 Impairment................................................................................................................................................................... 192
8 Contract modifications...................................................................................................................................... 194

8.1 Identifying a contract modification............................................................................................................................ 194
8.2 Accounting for a contract modification...................................................................................................................... 198
9 Licensing............................................................................................................................................................. 206
9.1 Licences of intellectual property................................................................................................................................. 207
9.2 Determining whether a licence is distinct.................................................................................................................. 209
9.3 Determining the nature of a distinct licence.............................................................................................................. 214
9.4 Timing and pattern of revenue recognition................................................................................................................ 220
9.5 Contractual restrictions and attributes of licences.................................................................................................... 223
9.6 Sales- or usage-based royalties.................................................................................................................................. 225
10 Other application issues.................................................................................................................................... 234

10.1 Sale with a right of return............................................................................................................................................ 234
10.2 Warranties.................................................................................................................................................................... 239
10.2.1 Applying guidance on warranties....................................................................................................................... 239
10.2.2 Distinguishing between an assurance- and a service-type warranty................................................................. 242
10.3 Principal vs agent considerations............................................................................................................................... 244
10.3.1 Unit of account.................................................................................................................................................. 245
Detailed contents | 347
10.3.2 Control assessment.......................................................................................................................................... 246

10.3.3 Recognition....................................................................................................................................................... 259
10.3.4 Transporting goods to customers...................................................................................................................... 261
10.4 Customer options for additional goods or services.................................................................................................. 263
10.4.1 General requirements....................................................................................................................................... 263
10.4.2 Practical alternative for similar goods or services...............................................................................................274
10.4.3 Customer loyalty programmes.......................................................................................................................... 278
10.5 Customers’ unexercised rights (breakage)................................................................................................................. 285
10.6 Non-refundable up-front fees...................................................................................................................................... 289
10.7 Sales outside ordinary activities................................................................................................................................. 295
11 Presentation........................................................................................................................................................ 299
11.1 Statement of financial position.................................................................................................................................. 299
11.1.1 Contract assets vs receivables.......................................................................................................................... 308
11.2 Statements of profit or loss and cash flows............................................................................................................... 312
12 Disclosure............................................................................................................................................................ 316
12.1 Annual disclosure........................................................................................................................................................ 316
12.1.1 Disaggregation of revenue................................................................................................................................ 318
12.1.2 Contract balances.............................................................................................................................................. 320
12.1.3 Performance obligations.................................................................................................................................... 322
12.1.4 Significant judgements when applying the standard......................................................................................... 324
12.1.5 Assets recognised for costs to obtain or fulfil a contract with a customer......................................................... 325
12.2 Interim disclosures....................................................................................................................................................... 325
13 Effective date and transition.............................................................................................................................. 326

13.1 Transition...................................................................................................................................................................... 326
13.2 Retrospective method................................................................................................................................................. 328
13.2.1 Practical expedient 1 – Contracts that are started and completed in the same annual reporting period............. 331
13.2.2 Practical expedient 2 – Exemption from applying variable consideration requirements..................................... 333
13.2.3 Practical expedient 3 – Contract modifications before the earliest period presented......................................... 334
13.2.4 Practical expedient 4 – Disclosure exemption................................................................................................... 336
13.3 Cumulative effect method........................................................................................................................................... 337
13.4 Consequential amendments to other IFRS requirements........................................................................................ 341
13.5 First-time adoption...................................................................................................................................................... 342
Guidance referenced..................................................................................................................................................... 344
Index of examples......................................................................................................................................................... 348
Index of KPMG insights................................................................................................................................................ 355
About this publication ................................................................................................................................................. 363
Index of examples
1 Step 1 – Identify the contract with a customer
Example 1 – Assessing the existence of a contract: Sale of real estate.............................................................................. 4
Example 2 – Assessing the existence of a contract: No written sales agreement.............................................................. 5
Example 3 – Collectability threshold: Assessment based on goods or services to be transferred...................................... 5
Example 4 – Framework agreement: No specified minimum purchases.......................................................................... 12
Example 5 – Framework agreement: Specified minimum purchases............................................................................... 12
Example 6 – Automotive: Combining nomination letter with subsequent purchase orders.............................................. 13
Example 7 – Automotive supplier: Contract exists for engineering services but not for supply of parts............................ 14
1.2 Contract term
Example 8 – Contract term: Economic incentives............................................................................................................ 15
Example 9 – Contract term: Cancellation without penalty after a specified period............................................................ 15
Example 10 – Contract term: Cancellable without penalty................................................................................................ 15
Example 11 – Cumulative catch-up adjustment for consideration received before a contract exists................................. 18
Example 12 – Combination of contracts: Software-related licence and customisation services....................................... 19
Example 13 – Combination of contracts with government-related entities....................................................................... 20
Example 14 – Combination of contracts: Equipment and modification services............................................................... 20
2 Step 2 – Identify the performance obligations in the contract
Example 1 – Single performance obligation in a contract.................................................................................................. 25
Example 2 – Multiple performance obligations in a contract............................................................................................. 26
Example 3 – Telco: Purchased modem and router with internet........................................................................................ 31
Example 4 – Telco: Wi-Fi hotspot access.......................................................................................................................... 31
Example 5 – Technology company: Ongoing support that is not distinct........................................................................... 32
Example 6 – Technology company: Software licence and customisation services............................................................ 32
Example 7 – Technology company: Hosted software with on-premises application.......................................................... 33
Example 8 – Media company: Magazine subscription that includes printed copies and access to online content............ 33
Example 9 – Automotive supplier: Pre-production activities are not distinct from prototype............................................ 34
Example 10 – Implied promise to reseller’s customers..................................................................................................... 35
Example 11 – Administrative task: Registration of software keys..................................................................................... 35
Example 12 – Implied performance obligation: Pre- and post-sale incentives................................................................... 37
Example 13 – Technology company: Set-up activities vs implementation services........................................................... 38
Example 14 – Telco: Activation fee in a wireless contract.................................................................................................. 39
Example 15 – Series of distinct goods or services treated as a single performance obligation......................................... 40
Example 16 – Distinct service periods within a long-term service contract...................................................................... 40
Example 17 – Automotive supplier: Series of distinct goods............................................................................................. 43
Example 18 – Investment management: Series of distinct services................................................................................. 43
Example 19 – Telco: Term wireless service contract with fixed fee and limited usage....................................................... 44
Example 20 – Automotive: Maintenance contract............................................................................................................ 44
Example 21 – Transaction processor: Processing arrangement........................................................................................ 45
Index of examples | 349
3 Step 3 – Determine the transaction price

Example 1 – Enterprise service contract with usage fee treated as variable consideration............................................... 48
Example 2 – Enterprise service contract with penalties................................................................................................... 49
Example 3 – Estimate of variable consideration: Expected value...................................................................................... 52
Example 4 – Estimate of variable consideration: Most likely amount................................................................................ 53
Example 5 – Estimate of variable consideration: Expected value: Multiple-tier rebates.................................................... 56
Example 6 – Estimate of variable consideration: Most likely amount: One-tier rebate...................................................... 56
Example 7 – Applying the constraint: Investment management contract......................................................................... 58
Example 8 – Applying the constraint: Success fee........................................................................................................... 59
Example 9 – Applying the constraint: Consideration based on occupancy of property..................................................... 60
Example 10 – Applying the constraint: Consideration dependent on regulatory approval................................................. 61
Example 11 – Applying the constraint: Bonus payment.................................................................................................... 62
Example 12 – Applying the constraint: Price concessions................................................................................................ 62
Example 13 – Significant financing component: Multiple-element arrangement.............................................................. 65
Example 14 – Significant financing component: Change in expected completion date..................................................... 66
Example 15 – Determining whether an arrangement has a significant financing component: Payment in advance.......... 67
Example 16 – Determining whether an arrangement has a significant financing component: Payment in arrears............ 68
Example 17 – Determining whether an arrangement has a significant financing component: Advance payment
and fixed delivery..............................................................................................................................................................74
Example 18 – Determining whether an arrangement has a significant financing component: Advance payment and
delivery at customer’s discretion.......................................................................................................................................74
Example 19 – Determining whether an arrangement has a significant financing component: Fixed vs variable
payment........................................................................................................................................................................... 75
Example 20 – Determining whether an arrangement has a significant financing component: Instalment payments
throughout the contract period......................................................................................................................................... 75
Example 21 – Determining whether an arrangement has a significant financing component: Payment in arrears
and an over-time contract................................................................................................................................................. 76
Example 22 – Determining whether an arrangement has a significant financing component: Financing component
is not significant............................................................................................................................................................... 76
Example 23 – Determining whether an arrangement has a significant financing component: No adjustment for the
financing component....................................................................................................................................................... 77
Example 24 – Non-cash consideration: Measured at contract inception........................................................................... 78
Example 25 – Non-cash consideration: Measured when the performance obligation is satisfied..................................... 79
Example 26 – Non-cash consideration: Free advertising................................................................................................... 79
Example 27 – Payments to customers: Reduction in the transaction price....................................................................... 82
Example 28 – Payments to customers: Variable consideration......................................................................................... 82
Example 29 – Payments to customers: Goodwill credits.................................................................................................. 85
Example 30 – Payments to customers: Credits to a new customer.................................................................................. 86
Example 31 – Payments to customers: Consideration paid to a customer’s customer..................................................... 86
Example 32 – Payments to customers: Payment on entering into a new framework agreement..................................... 87
Example 33 – Payments to customers: New product for a new customer....................................................................... 87
Example 34 – Payments to customers: Volume rebates................................................................................................... 88
3.5 Sales taxes
Example 35 – Sales taxes: Gross accounting for excise duties......................................................................................... 89
Example 36 – Sales taxes: Net accounting for excise duties............................................................................................ 89
Example 37 – Sales taxes: Gross accounting for export taxes.......................................................................................... 89
4 Step 4 – Allocate the transaction price to the performance obligations in the contract
Example 1 – Estimating stand-alone selling price: Residual approach.............................................................................. 96
Example 2 – Allocating the transaction price.................................................................................................................... 99
Example 3 – Allocating a discount: Transaction involving a customer loyalty programme............................................... 102
Example 4 – Allocating a discount: Discount allocated entirely to one or more, but not all, performance obligations
in a contract.................................................................................................................................................................... 104
Example 5 – Allocating a discount: Bundle discount allocated to all performance obligations in a contract..................... 105
Example 6 – Allocating variable consideration: Variable consideration allocated entirely to one performance
obligation in the contract................................................................................................................................................ 106
Example 7 – Allocating variable consideration: Each shipment is a distinct performance obligation............................... 107
Example 8 – Allocating variable consideration: Series of distinct services...................................................................... 108
Example 9 – Technology company: Up-front fees and allocation of variable consideration.............................................. 109
Example 10 – Pharmaceutical company: Allocating elements of the transaction price to specific performance
obligations.......................................................................................................................................................................110
Example 11 – Pharmaceutical company: Allocating variable consideration to multiple performance obligations.............110
Example 12 – Discretionary credit: Service quality issue................................................................................................. 111
Example 13 – Discretionary credit: Retention..................................................................................................................112
5 Step 5 – Recognise revenue when or as the entity satisfies a performance obligation
Example 1 – Assessing whether another entity would need to reperform the work completed......................................117
Example 2 – Applying the guidance on alternative use....................................................................................................119
Example 3 – Applying the guidance on alternative use: Automotive supplier...................................................................119
Example 4 – Applying the over-time criteria: Consulting contract................................................................................... 123
Example 5 – Applying the over-time criteria: Sales of real estate: No alternative use and enforceable right to
payment......................................................................................................................................................................... 124
Example 6 – Applying the over-time criteria: Bottle manufacturer................................................................................... 129
Example 7A – Applying the over-time criteria: Real estate developer: Criterion 3 not met (1)......................................... 129
Example 7B – Applying the over-time criteria: Real estate developer: Criterion 3 not met (2)......................................... 130
Example 8 – Applying the over-time criteria: No enforceable right to payment............................................................... 131
5.3 Measuring progress towards complete satisfaction of a performance obligation
Example 9 – Time-based measure of progress: Technical support services.................................................................... 133
Example 10 – Time-based measure of progress: Unspecified updates........................................................................... 133
Example 11 – Cost-to-cost measure of progress: Stand-ready maintenance contract.................................................... 138
Example 12 – Telco: Monthly prepaid wireless contract.................................................................................................. 138
Example 13 – Wireless service contract with rollover minutes....................................................................................... 139
Example 14 – Measure of progress for a performance obligation involving multiple goods and services....................... 140
Example 15 – Uninstalled materials................................................................................................................................ 141
Example 16 – Applying ‘as-invoiced’ practical expedient: Cleaning services................................................................... 143
Example 17A – Applying ‘as-invoiced’ practical expedient: Change in rates linked to CPI............................................... 145
Example 17B – Applying ‘as-invoiced’ practical expedient: Change in unit price linked to a fixed change........................ 146
Example 17C – Applying ‘as-invoiced’ practical expedient: Different per-unit rates within a performance obligation...... 146
Example 18 – Applying ‘as-invoiced’ practical expedient: Enterprise service contract with usage fee treated
as variable consideration................................................................................................................................................ 147
Example 19 – Applying ‘as-invoiced’ practical expedient: Up-front fees.......................................................................... 147
Example 20 – Applying ‘as-invoiced’ practical expedient: Non-substantive contractual minimum.................................. 148
5.4 Performance obligations satisfied at a point in time

Example 21 – Handset trade-in....................................................................................................................................... 154
Example 22 – Retail: Consignment arrangement........................................................................................................... 157
Example 23 – Automotive: Consignment arrangement.................................................................................................. 157
Example 24 – Automotive: Not a consignment arrangement.......................................................................................... 158
Example 25 – Bill-and-hold arrangement........................................................................................................................ 160
6 Scope
6.1 In scope
Example 1 – Identifying in-scope contracts.................................................................................................................... 162
6.2 Out of scope
Example 2 – Non-monetary exchanges between telecom companies........................................................................... 164
Example 3 – Zero residual amount after applying other accounting requirements.......................................................... 167
Example 4 – Collaborative agreement............................................................................................................................ 167
Example 5 – Telco: Partially in-scope transaction............................................................................................................ 169
Example 6 – Investment contracts that are not insurance contracts............................................................................... 170
Example 7 – Media: Collaborative arrangement............................................................................................................. 170
Example 8 – Automotive: Collaborative agreement........................................................................................................ 171
Example 9 – Portfolio approach applied to costs............................................................................................................. 171
7 Contract costs
Example 1 – Costs incurred to obtain a contract: Sales commissions to employees....................................................... 174
Example 2 – Costs incurred to obtain a contract: Sales commissions to employees vs advertising................................ 177
Example 3 – Costs incurred to obtain a contract: Sales commissions vs wages to sales staff........................................ 177
Example 4 – Commission paid on renewals after the initial contract is obtained............................................................ 178
Example 5 – Dealer commission with claw-back provision............................................................................................. 178
Example 6 – Commission plan with tiered thresholds: Cumulative effect...................................................................... 179
Example 7 – Set-up costs: Managed data centre............................................................................................................ 181
Example 8 – Training costs expensed as incurred........................................................................................................... 184
Example 9 – Set-up costs: Customised part for carmaker.............................................................................................. 185
Example 10 – Mobilisation costs.................................................................................................................................... 186
Example 11 – Reconfiguration costs............................................................................................................................... 186
7.3 Amortisation
Example 12 – Amortisation: Specifically anticipated contracts....................................................................................... 187
Example 13 – Amortisation: Acquisition costs for month-to-month contracts................................................................. 188
Example 14 – Amortisation: Renewal commissions....................................................................................................... 191
Example 15 – Amortisation: Commission paid on renewals after the initial contract is obtained..................................... 191
7.4 Impairment
Example 1 – Assessing whether a contract modification is approved............................................................................. 194
Example 2 – Contract claim for delays caused by the customer..................................................................................... 196
Example 3 – Contract modification: Additional goods or services................................................................................... 201
Example 4 – Contract modification: An unpriced change order....................................................................................... 201
Example 5 – Contract modification: Partially satisfied performance obligation and additional distinct goods
or services..................................................................................................................................................................... 202
Example 6 – Contract modification: Additional goods or services: Car supply agreement.............................................. 205
9 Licensing
Example 1 – Promise is a service not a licence............................................................................................................... 207
Example 2 – Promise is a licence.................................................................................................................................... 207
Example 3 – Intellectual property (IP) licence in combined performance obligation........................................................ 210
Example 4 – Customer’s option to purchase additional licences..................................................................................... 210
Example 5 – Licence for drug compound and related service: Separate performance obligations.................................. 213
Example 6 – Licence for drug compound and related service: Single performance obligation........................................ 213
Example 7 – Assessing the nature of a software licence with unspecified upgrades...................................................... 215
Example 8 – Assessing the nature of a film licence and the effect of marketing activities.............................................. 216
Example 9A – Assessing the nature of a team name and logo licence: Active sports team............................................ 219
Example 9B – Assessing the nature of a team name and logo licence: Sports team that is no longer active.................. 219
Example 10 – Licence for right to access IP.................................................................................................................... 220
Example 11A – Right-to-access licence.......................................................................................................................... 221
Example 11B – Right-to-use licence............................................................................................................................... 221
Example 12 – Renewal of a right-to-use licence.............................................................................................................. 222
9.5 Contractual restrictions and attributes of licences
Example 13A – Licence of IP: Hold-back period.............................................................................................................. 223
Example 13B – Licence of IP: Usage limitations............................................................................................................. 224
Example 14 – Royalty: Licence of IP is the predominant item......................................................................................... 226
Example 15A – Software licence with a guaranteed minimum (1).................................................................................. 229
Example 15B – Software licence with a guaranteed minimum (2).................................................................................. 230
Example 16 – Allocation of guaranteed minimum among multiple performance obligations.......................................... 230
Example 1 – Sale with a right of return........................................................................................................................... 235
10.2 Warranties
Example 1 – Sale of a product with a warranty............................................................................................................... 240
Example 2 – Lifetime warranty....................................................................................................................................... 242
Example 1 – Specified good or service is the underlying product ordered...................................................................... 245
Example 2 – Specified good or service is a right to a specified good or service.............................................................. 245
Example 3 – Entity arranges for the provision of goods or services................................................................................ 248

Example 4 – Entity is an agent and a principal for sales of virtual or intangible goods..................................................... 249
Example 5 – Entity is a principal for advertising services provided by a subcontractor.................................................... 252
Example 6 – Entity is a principal for consulting services provided by a subcontractor..................................................... 252
Example 7 – Entity is a principal even though it does not take physical possession of goods......................................... 253
Example 8 – Entity is an agent when goods and services delivered directly to customer by third parties....................... 254
Example 9 – Entity is a principal in website sales........................................................................................................... 255
Example 10 – Entity is an agent in providing a service.................................................................................................... 256
Example 11 – Specified good or service is an input into a combined output................................................................... 258
Example 12 – Revenue recognition by a principal........................................................................................................... 259
Example 13 – Revenue recognition by an agent............................................................................................................. 259
Example 14 – Estimating gross revenue as a principal: Discount attributed to the company.......................................... 260
Example 15 – Estimating gross revenue as a principal: Discount attributed to the intermediary..................................... 261
Example 16A – Accounting for transportation costs: Entity is a principal........................................................................ 262
Example 16B – Accounting for transportation costs: Entity is an agent.......................................................................... 263
10.4 Customer options for additional goods or services
Example 1 – Cable television service and additional premium channels......................................................................... 265
Example 2 – Product sold with a discount voucher ........................................................................................................ 265
Example 3A – Custom product with learning curve effect: No material right.................................................................. 270
Example 3B – Custom product with learning curve effect: Material right....................................................................... 271
Example 4 – Custom production line: No material right.................................................................................................. 271
Example 5 – Prospective volume rebate: Material right.................................................................................................. 272
Example 6 – Prospective discounts: No material right vs material right.......................................................................... 272
Example 7 – Periodic price decreases in a framework agreement: No material right.......................................................274
Example 8 – Applying the practical alternative.................................................................................................................274
Example 9A – Applying the practical alternative: Contract-by-contract basis.................................................................. 276
Example 9B – Applying the practical alternative: Portfolio approach............................................................................... 277
Example 10A – Customer loyalty points programme: Increase in estimated redemptions............................................. 279
Example 10B – Customer loyalty points programme: Decrease in estimated redemptions............................................ 280
Example 11 – Airline customer loyalty points programme.............................................................................................. 280
Example 12A – Third party customer loyalty programme (1)........................................................................................... 283
Example 12B – Third party customer loyalty programme (2)........................................................................................... 284
Example 1 – Sale of a prepaid phone card: Entity expects to be entitled to breakage..................................................... 286
Example 2 – Sale of a prepaid phone card: Entity does not expect to be entitled to breakage........................................ 287
Example 3 – Airline expects ticket breakage and can estimate it reliably........................................................................ 287
Example 1 – Non-refundable up-front fees: Annual contract........................................................................................... 290
Example 2 – Non-refundable up-front fees: Activity does not transfer a good or service................................................ 293
Example 3 – Non-refundable up-front fees: Investment management services............................................................. 293
Example 4 – Activation fee in a month-to-month telco wireless contract........................................................................ 294
Example 1 – Sale of a single-property real estate........................................................................................................... 296
11 Presentation
Example 1 – Contract liability and receivable: Cancellable contract................................................................................ 299
Example 2 – Impairment assessment of contract assets: Variable consideration........................................................... 304
Example 3 – Impairment assessment of contract assets: Contracts with multiple performance obligations.................. 305
Example 4 – Current vs non-current classification: Contract assets: Telco...................................................................... 305
Example 5 – Current vs non-current classification: Contract assets: Real estate developer........................................... 306
Example 6 – Current vs non-current classification: Contract assets: Service concession............................................... 307

Example 7A – Current vs non-current classification: Contract liabilities: Full prepayment for a good that transfers
at a point in time............................................................................................................................................................. 307
Example 7B – Current vs non-current classification: Contract liabilities: Full prepayment for a good that transfers over
time................................................................................................................................................................................ 308
Example 8 – Contract liability and receivable: Non-cancellable contract......................................................................... 308
Example 9A – Recognising receivables: Compensation on termination..........................................................................311
Example 9B – Recognising receivables: Milestone payments........................................................................................ 312
Example 10 – Recognising receivables: Variable consideration....................................................................................... 312
Example 11A – Presentation of amortisation of contract costs: Expenses by function................................................... 314
Example 11B – Presentation of amortisation of contract costs: Expenses by nature...................................................... 315
12 Disclosure
Example 1 – Disaggregation of revenue......................................................................................................................... 318
13 Effective date and transition

13.1 Transition
Example 1 – Transition: Deferred balance relating to a completed contract.................................................................... 327
Example 2 – Full retrospective method.......................................................................................................................... 329
Example 3 – Applying practical expedient 1: Multiple contracts..................................................................................... 331
Example 4 – Applying practical expedient 1: Comparative period................................................................................... 332
Example 5 – Applying practical expedient 2: Returned products..................................................................................... 333
Example 6 – Applying practical expedient 2: Performance-based fee............................................................................. 333
Example 7 – Applying practical expedient 3.................................................................................................................... 335
Example 8 – Applying practical expedient 4.................................................................................................................... 336
Example 9 – Cumulative effect method.......................................................................................................................... 338
Example 10 – Cumulative effective method: Sale with right of return............................................................................. 338
Example 11 – Cumulative effective method: Rebate arrangement................................................................................. 339
Example 12 – Cumulative effective method: Incomplete contract.................................................................................. 339
13.4 Consequential amendments to other IFRS requirements
Example 13 – Consequential amendments.................................................................................................................... 341
Example 14 – First-time adopter of IFRS........................................................................................................................ 343
Index of KPMG insights | 355
Index of KPMG insights

1 Step 1 – Identify the contract with a customer
Assessment focuses on enforceability, not form of the contract........................................................................................ 6
Collectability is only a gating question................................................................................................................................ 6
Collectability is assessed based on the amount that the entity expects to receive in exchange for goods or services....... 6
Judgement is required to differentiate between a collectability issue and a price concession........................................... 7
Collectability threshold may be assessed using information derived at the portfolio level.................................................. 7
Collectability is reassessed only when there is a significant deterioration in the customer’s credit-worthiness................. 8
Collectability assessment required for contracts with a significant financing component.................................................. 8
Fiscal funding clauses may affect the assessment of whether a contract exists................................................................ 8
Enforceable rights and obligations for an expired contract when the entity continues to provide services......................... 9
Free trial period offers........................................................................................................................................................ 9
Success-based fee arrangements.................................................................................................................................... 10
Contracting practices may need to be evaluated by customer class................................................................................. 10
Two definitions of a contract exist in IFRS.........................................................................................................................11
Minimum purchase requirements.................................................................................................................................... 12
Additional steps may be required to create legally enforceable rights and obligations...................................................... 13
Purchase orders under the same framework agreement may be inter-related................................................................. 13
1.2 Contract term
Contract term affects many parts of the standard............................................................................................................ 16
Consideration payable on termination can affect assessment of contract term................................................................ 16
Compensation is broader than only termination payments.............................................................................................. 16
Ability of either party to cancel the contract at discrete points in time may limit the contract term.................................. 16
Evergreen contracts......................................................................................................................................................... 17
Only the customer has a right to terminate the contract.................................................................................................. 17
Revenue recognition may be deferred for a significant period.......................................................................................... 18
A receivable is generally not recognised when the collectability threshold is not met...................................................... 19
Evaluating ‘at or near the same time’ when determining whether contracts should be combined................................... 21
Definition of related parties acquires new significance .................................................................................................... 21
No exception for contracts entered into with different divisions of the same entity......................................................... 22
Additional complexities for sales through distribution channels....................................................................................... 22
2 Step 2 – Identify the performance obligations in the contract
Applying the indicators will require judgement................................................................................................................. 27
Applying Criterion 2 requires an entity to assess whether there is a transformative relationship between the two items
being analysed................................................................................................................................................................. 29
Separability of risks considered in determining whether goods or services are separately identifiable............................ 29
Goods or services promised to a customer’s customer may be a performance obligation............................................... 30
Contractual restrictions may not be determinative........................................................................................................... 30
Only promises that transfer goods or services to the customer can be performance obligations..................................... 36
Set-up activities as administrative task............................................................................................................................. 36
Providing end-user documentation is generally an administrative task............................................................................. 36

Distinguishing between an administrative task and a promised good or service ............................................................. 36
No exemption from applying the series guidance............................................................................................................. 41
Accounting for a series is intended to provide a simplification of the model..................................................................... 41
Determining the nature of the entity’s promise to the customer is the first step in applying the series guidance............. 42
Identifying distinct goods or services as a series may affect the allocation of variable consideration............................... 42
Not necessary for goods or services to be provided consecutively ................................................................................. 42
3 Step 3 – Determine the transaction price
Transaction price may include amounts not paid by the customer.................................................................................... 47
Transaction price may include fair value of derivative on settlement date......................................................................... 47
Consideration can be deemed to be variable even if the price stated in the contract is fixed............................................ 49
A fixed rate per unit of output may be variable consideration........................................................................................... 49
Quantity subject to confirmation after delivery is variable consideration.......................................................................... 50
Provisional pricing based on market price of commodity.................................................................................................. 50
Variable consideration or optional purchases.................................................................................................................... 50
Volume discounts or rebates may be variable consideration or may convey a material right............................................. 51
A transaction price denominated in a foreign currency does not constitute variable consideration................................... 51
Liquidated damages may represent variable consideration or a product warranty............................................................ 52
All facts and circumstances are considered when selecting estimation method.............................................................. 53
Expected value method – No need to quantify less probable outcomes.......................................................................... 54
Expected value method – Estimated amount does not need to be a possible outcome for an individual contract............ 54
Historical experience may be a source of evidence.......................................................................................................... 55
A combination of methods may be appropriate................................................................................................................ 55
Constraint assessment made against cumulative revenue.............................................................................................. 60
Specified level of confidence included in constraint requirements................................................................................... 60
Constraint introduces an element of prudence................................................................................................................ 60
Assessment is undertaken at the individual contract level............................................................................................... 70
No significant financing component if the timing of transfer of goods or services is at the customer’s discretion............ 70
Contracts with a payment scheduled for part-way through the performance period may contain a significant
financing component....................................................................................................................................................... 70
Contracts with material right may contain a significant financing component.................................................................. 71
Limited examples in the standard of when payments have a primary purpose other than financing................................ 71
Accounting for long-term and multiple-element arrangements with a significant financing component may
be complex...................................................................................................................................................................... 71
Using an interest rate that is explicitly specified in the contract may not be appropriate.................................................. 72
Interest income recognised from a significant financing component may be presented as ‘revenue’ but not
‘revenue from contracts with customers’........................................................................................................................ 72
Advance payments may affect EBITDA............................................................................................................................ 72
Application of the practical expedient to a contract with multiple performance obligations.............................................. 73
A contract with an implied interest rate of zero may contain a financing component........................................................ 73
Interest accrued on a contract liability is a borrowing cost eligible for capitalisation..........................................................74
Constraint does not apply when variation is due to the form of non-cash consideration................................................... 79
Transfers of assets from customers................................................................................................................................. 80
Barter transactions involving advertising services............................................................................................................ 80

Payments to distributors and retailers may be for distinct goods or services................................................................... 82
Slotting fees..................................................................................................................................................................... 83
Nomination fees............................................................................................................................................................... 83
Scope of consideration payable to a customer is wider than payments made under the contract.................................... 84
Consideration payable may include payments made outside a direct distribution chain................................................... 84
Amounts payable to a customer may be either variable consideration or consideration payable to a customer................ 85
3.5 Sales taxes
4 Step 4 – Allocate the transaction price to the performance obligations in the contract
The standard does not contain a reliability threshold........................................................................................................ 91
Judgement is often required to estimate stand-alone selling price................................................................................... 92
Single good or service may have more than one stand-alone selling price....................................................................... 94
If there is a range of observable prices, then a stated contract price within the range may be an acceptable
stand-alone selling price................................................................................................................................................... 94
Using a range to estimate stand-alone selling prices........................................................................................................ 95
The residual approach is an estimation technique, not an allocation method.................................................................... 97
In contracts for intellectual property or other intangible products, a residual approach may be appropriate
for determining a stand-alone selling price....................................................................................................................... 97
The assessment of whether it is appropriate to use a residual approach should be made separately for each
good or service................................................................................................................................................................ 98
Consideration allocated is unlikely to be zero or close to zero........................................................................................... 98
Allocating the transaction price may be simple if stated contract prices are acceptable estimates of stand-alone
selling price...................................................................................................................................................................... 99
Additional calculations are necessary if the stand-alone selling price of one or more performance obligations
differs from its stated contract price............................................................................................................................... 100
Analysis is required when a large number of goods or services are bundled in various ways......................................... 103
Determination of ‘regularly sells’ is a key judgement...................................................................................................... 103
Guidance on allocating a discount typically applies to contracts with at least three performance obligations................. 104
Variable consideration allocation guidance is applied before the guidance on allocating discounts................................. 107
Evaluating whether the allocation objective is met when allocating variable consideration to a distinct service
period in a series............................................................................................................................................................ 108
5 Step 5 – Recognise revenue when or as the entity satisfies a performance obligation

Use of control concept to recognise revenue aligns with the accounting for assets........................................................114
Differences in assumptions used when applying Criteria 1 and 3....................................................................................117
Determining whether a commodity transfers over time may depend on Criterion 1........................................................117
Application to service concession arrangements............................................................................................................118
Many factors to consider when evaluating alternative use..............................................................................................119
Evaluating whether costs of rework are significant........................................................................................................ 120
A right to payment may be established by relevant laws and regulations....................................................................... 124
Use of legal opinion when assessing enforceability of right to payment........................................................................ 125
Agreements for the construction of real estate may have different patterns of transfer of control................................. 125
Enforceable right to payment for standard materials used as inputs.............................................................................. 126
Termination of an over-time contract.............................................................................................................................. 126
5.3 Measuring progress towards complete satisfaction of a performance obligation

Determining which measure of progress to apply is not a free choice............................................................................ 134
Single method of measuring progress is used for a performance obligation.................................................................. 134
Certain sales agent arrangements may be over-time...................................................................................................... 135
Measure of progress for stand-ready obligations is not always straight‑line................................................................... 135
Milestone method may not depict pattern of performance............................................................................................ 136
A performance obligation may be partially satisfied before the contract is identified ..................................................... 136
Borrowing costs when revenue is recognised over time................................................................................................ 137
Design and production services – A units-of-delivery method or a units-of-production method may not be
appropriate .................................................................................................................................................................... 140
No guidance on the timing and pattern of the recognition of margin on uninstalled materials........................................ 142
No detailed guidance on identifying inefficiencies and wasted materials....................................................................... 143
Consideration does not need to be a fixed amount per unit to recognise revenue at the amount that the entity
has a right to invoice....................................................................................................................................................... 143
Arrangements that include a contractual minimum........................................................................................................ 144
Practical expedient may not be available when a contract includes a significant up-front fee ......................................... 145
Rebates, credits and refunds generally preclude application of the practical expedient................................................. 145
5.4 Performance obligations satisfied at a point in time
Judgement may be required to determine the point in time at which control transfers.................................................. 150
Potential challenges may exist in determining the accounting for some delivery arrangements .................................... 150
Indirect channels and sell-in vs sell-through................................................................................................................... 151
An approach that focuses on the repurchase price......................................................................................................... 154
Requirements for repurchase agreements not applicable to arrangements with a guaranteed resale amount............... 155
Conditional forwards or call options............................................................................................................................... 155
Right of first refusal ....................................................................................................................................................... 156
6 Scope
6.1 In scope
Determining whether an activity is ‘ordinary’ may require judgement............................................................................ 163
Sales of by-products may be in the scope of the standard.............................................................................................. 163
6.2 Out of scope
Product and service warranties – Revenue vs provisions standard................................................................................. 164
Contributions in non-exchange transactions are outside the scope of the standard....................................................... 164
Settlement of imbalances in non-monetary exchanges.................................................................................................. 165
In some cases, there will be little or no residual amount remaining to allocate............................................................... 167
A counterparty may be both a collaborator and a customer............................................................................................ 168
Rate-regulated entities applying specific requirements do not apply the standard to movements in regulatory
deferral account balances............................................................................................................................................... 168
Parts of the standard apply to sales of non-financial assets............................................................................................ 168
Financial services fees – Revenue vs financial instruments standard............................................................................. 168
Determining the contract term when a contract contains lease and non-lease components.......................................... 169
Entities need to consider costs vs benefits of portfolio approach................................................................................... 172
No specific guidance on assessing whether portfolio approach can be used................................................................. 172
7 Contract costs
Practical expedient applies if the amortisation period is less than one year.................................................................... 175
Capitalising commission when associated liability is accrued........................................................................................ 175
Judgement required for multiple-tier commissions.........................................................................................................176
Applicability of the cost capitalisation guidance in the revenue standard........................................................................ 182
Judgement needed in determining whether cost capitalisation criteria are met............................................................ 182
Judgement needed in determining whether to capitalise learning curve costs.............................................................. 182
Costs in excess of constrained transaction price............................................................................................................ 183
Transportation services and costs.................................................................................................................................. 183
Back-end-loaded costs................................................................................................................................................... 184
7.3 Amortisation
Amortisation period may need to include anticipated contracts..................................................................................... 188
Anticipated contracts included when determining whether practical expedient applies................................................. 188
Judgement is required when contracts include recurring commissions......................................................................... 189
Systematic amortisation for contract assets related to multiple performance obligations.............................................. 189
No correlation with the accounting for non-refundable up-front fees.............................................................................. 190
Presentation of amortisation costs may often depend on the nature of the entity and its industry................................. 190
7.4 Impairment
Impairment model specifically for capitalised contract costs......................................................................................... 192
Specific anticipated contracts are considered in impairment test................................................................................... 193
Discounting may be relevant for long-term contracts..................................................................................................... 193
Assessment focuses on enforceability........................................................................................................................... 196
Criteria to determine when a modification is approved................................................................................................... 196
Contract claims are evaluated using the guidance on contract modifications................................................................. 197
Partial contract terminations are accounted for as contract modifications...................................................................... 198
Different approaches for common types of contract modifications................................................................................ 204
Distinct goods or services in a series that are treated as a single performance obligation are considered
separately...................................................................................................................................................................... 204
Interaction of new contracts with pre-existing contracts needs to be considered.......................................................... 204
Accounting for contract asset on termination of an existing contract and creation of a new one.................................... 204
9 Licensing
Different accounting for a licence and sale of intellectual property (IP)........................................................................... 208
No definition of intellectual property.............................................................................................................................. 208
IP that forms part of tangible asset................................................................................................................................. 208
Distinguishing between a licence and service................................................................................................................ 208
Assessing whether a licence is distinct may require significant judgement....................................................................211
Customer’s option to purchase additional licences......................................................................................................... 212
Franchise licences generally provide a right to access IP................................................................................................ 216
Only consider licensor’s activities that do not transfer a good or service to the customer.............................................. 216
Effect of different attributes of a licence on determining the nature of the entity’s promise........................................... 217
Entity’s activities that significantly affect the IP.............................................................................................................. 217
Cost and effort to undertake activities are not the focus of the analysis......................................................................... 218
Application of the general guidance on performance obligations satisfied at a point in time........................................... 222
9.5 Contractual restrictions and attributes of licences
No explicit guidance on distinguishing attributes of a licence from additional licences................................................... 224
Distinguishing attributes of a single licence from additional promises to transfer licences............................................. 224
Substantial break between periods during which a customer is able to use (or access) IP............................................. 225
Exception for sales- or usage-based royalties aligns the accounting for different licence types...................................... 226
Judgement is required to assess when a licence of IP is ‘predominant’......................................................................... 226
Application of royalties exception to milestone payments.............................................................................................. 227
Guaranteed minimum payment – Right-to-use licence................................................................................................... 228
Guaranteed minimum payment – Right-to-access licence............................................................................................. 228
Variable royalty rates – Right-to-use licence................................................................................................................... 228
Variable royalty rates – Right-to-access licence.............................................................................................................. 229
Allocating sales- or usage-based royalties to multiple performance obligations............................................................. 229
Partial refunds are measured based on the portion expected to be refunded................................................................. 237
Restocking fees and costs.............................................................................................................................................. 237
Conditional right of return............................................................................................................................................... 238
Historical experience may be a source of evidence for estimating returns..................................................................... 238
10.2 Warranties
A refund for defective services may be variable consideration rather than a warranty.................................................... 240
Defective product returns in exchange for compensation .............................................................................................. 241
Liquidated damages and similar types of contractual terms........................................................................................... 241
Some warranty arrangements may be in the scope of the insurance standard............................................................... 241
‘Reasonably account’ threshold is undefined................................................................................................................. 243
Length of the warranty period is an indicator of the type of warranty, but is not always determinative........................... 243
Repairs outside the warranty period as a customary practice......................................................................................... 244
An ‘extended warranty’ may be a service-type warranty or an assurance-type warranty................................................ 244
Unit of account is the specific good or service............................................................................................................... 246
The specified good or service may be a right.................................................................................................................. 246
Principal-agent indicators support application of the general control principle, but cannot override it............................. 249
Certain conditions may help with control determination................................................................................................ 250
No individual indicator is generally determinative........................................................................................................... 250
Providing a significant integration service is determinative............................................................................................ 251
Entity obtains only flash title before transfer to the customer........................................................................................ 251
Entity may still be principal for tangible asset even if it does not take physical possession............................................. 251
No specific guidance on allocating a discount when an entity is a principal for part of the arrangement and an
agent for the other part.................................................................................................................................................. 260
Estimating gross revenue as a principal.......................................................................................................................... 260
10.4 Customer options for additional goods or services
Determining whether a material right exists requires an evaluation of both quantitative and qualitative factors............. 266
Customers’ options that provide accumulating rights are assessed in aggregate.......................................................... 267
Exercise of a material right............................................................................................................................................. 267

Estimate of the likelihood of exercise of an option is not revised.................................................................................... 268
Estimating the stand-alone selling price of ‘free’ gift cards and coupons........................................................................ 268
Coupons issued at the point of sale................................................................................................................................ 268
Volume discounts and rebates....................................................................................................................................... 269
Evaluating optional purchases at a discount compared with the original contract........................................................... 269
A cancellable contract may contain a material right........................................................................................................ 270
Alternative approach not limited to renewal options....................................................................................................... 275
More than one acceptable approach to determine the expected goods or services to be provided................................ 276
No significant financing component in most customer loyalty programmes ................................................................. 281
Cancellable customer loyalty programmes may be implicit performance obligations..................................................... 281
Treatment of customer credit card arrangements.......................................................................................................... 281
Residual approach generally not appropriate for determining stand-alone selling price of loyalty points......................... 282
Amounts payable to third party loyalty programme operators ....................................................................................... 285
Constraint applies even though consideration amount is known.................................................................................... 288
Breakage does not constitute variable consideration..................................................................................................... 288
Prepaid stored-value products may be financial liabilities............................................................................................... 288
Portfolio of data can be used for estimating expected breakage..................................................................................... 288
Quantitative and qualitative indicators are considered when assessing up-front fees.................................................... 291
Determining whether a non-refundable up-front fee relates to the transfer of a promised good or service ................... 291
Up-front fee may need to be allocated............................................................................................................................ 292
Deferral period for non-refundable up-front fee depends on whether the fee provides a material right.......................... 292
Consideration of whether a non-refundable up-front fee gives rise to a significant financing component...................... 292
Up-front fees in the funds and insurance industries....................................................................................................... 292
Judgement required to identify ordinary activities.......................................................................................................... 296
Accounting for a non-current non-financial asset held for sale may result in a gain or loss on transfer of control
because consideration may differ from fair value............................................................................................................ 297
Applying transaction price guidance on measuring consideration received or receivable............................................... 297
Little difference in accounting for sales of real estate to customers and non-customers................................................ 297
Transfers to inventory are still possible if specific criteria are met.................................................................................. 298
11 Presentation
Contract asset and contract liability – Based on past performance................................................................................. 300
Single contract asset or contract liability for contracts with multiple performance obligations....................................... 300
Contract assets and contract liabilities for multiple contracts are not netted.................................................................. 301
Impairment assessment of contract assets for contracts with multiple performance obligations.................................. 301
Impairment assessment of contract assets when the consideration is variable............................................................. 301
Classification as current vs non-current.......................................................................................................................... 302
Presentation of costs to obtain and costs to fulfil a contract in the statement of financial position................................. 303
Receivable vs contract asset – Distinction based on unconditional right to consideration.............................................. 309
Receivable vs contract asset – Refund obligations do not impact the analysis............................................................... 310
Milestone payments under over-time contracts............................................................................................................. 310
Recognising a receivable when the consideration is variable..........................................................................................311
Presenting ‘revenue from contracts with customers’ separately on the face of the statement of profit or loss is
not required.................................................................................................................................................................... 313
Interest income recognised from a significant financing component may be presented as ‘revenue’ but not
‘revenue from contracts with customers’...................................................................................................................... 313
Presentation of amortisation costs in the statement of profit or loss............................................................................. 313
Classification of cash flows related to contract costs depends on the nature of the activity........................................... 314
12 Disclosure
Revenue is a gross number............................................................................................................................................ 317
No minimum number of categories required.................................................................................................................. 319
Disaggregation of revenue may be at a different level from segment disclosures.......................................................... 320
Changes in the transaction price may need to be disclosed........................................................................................... 321
Remaining performance obligation disclosures may differ from backlog disclosures..................................................... 323
Contract renewals are included only if they provide a material right............................................................................... 323
Certain contracts can be excluded from remaining performance obligation disclosures................................................ 323
Constrained transaction price is used in the remaining performance obligation disclosures.......................................... 324
Greater specificity in the revenue standard.................................................................................................................... 324
Extent of interim revenue disclosures requires judgement ........................................................................................... 325
13 Effective date and transition
13.1 Transition
All contracts (open and closed) under previous requirements require consideration...................................................... 330
Cost and income tax line items may also require adjustment......................................................................................... 330
Regulatory requirements need to be considered........................................................................................................... 330
Relief provided by practical expedient 1......................................................................................................................... 332
Limited hindsight allowed.............................................................................................................................................. 334
Use of the practical expedient may bring forward revenue recognition.......................................................................... 334
Exemption from restating for contract modifications that occur before the start of the earliest period presented......... 336
Disclosure relief only...................................................................................................................................................... 337
Dual reporting still required............................................................................................................................................ 340
Cumulative effect method reduces comparability.......................................................................................................... 340
Choosing to apply the cumulative effect method to all contracts may improve comparability ........................................ 340
Contract modification practical expedient simplifies implementation but reduces comparability................................... 341
13.4 Consequential amendments to other IFRS requirements
About this publication | 363
About this publication

Content
Our IFRS handbooks are prepared to address practical application issues that an
entity may encounter when applying a specific standard or interpretation. They
include discussion of the key requirements, guidance and examples to elaborate
or clarify the practical application issues of the requirements. This edition of IFRS
handbook provides a comprehensive analysis of IFRS 15 Revenue from Contracts
with Customers and addresses practical application issues that KPMG member
firms have encountered. It includes extensive interpretative guidance and
illustrative examples.
This handbook reflects standards in issue at 1 June 2019 that are effective for
annual periods beginning on or after 1 January 2019. This handbook focuses on the
requirements of IFRS 15 and its interaction with other standards, though it does not
provide a comprehensive analysis of the requirements of the other standards and
interpretations to which it refers. Further discussion and analysis of these standards
and interpretations is included in our publication Insights into IFRS.
In many cases, further analysis and interpretation may be needed for an entity to
apply the requirements to its own facts, circumstances and individual transactions.
Furthermore, some of our observations may change and new observations will
be made as issues arise from the implementation of the new guidance and as
practice develops.
IFRS and its interpretation change over time. Accordingly, neither this handbook
nor any of our other publications should be used as a substitute for referring to the
standards and interpretations themselves.
Keeping in touch
Follow ‘KPMG IFRS’ on LinkedIn or visit home.kpmg/ifrs for the latest on IFRS.
Whether you are new to IFRS or a current user, you can find digestible summaries of
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Keeping in touch | 365
Major new standards
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handbook payments handbook
Business Presentation and

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For access to an extensive range of accounting, auditing and financial reporting guidance
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Acknowledgments
This publication has been produced by the KPMG International Standards Group
(part of KPMG IFRG Limited). We are grateful for the input of current and former
members of the group and the Department of Professional Practice of KPMG LLP in
the US.
We would like to acknowledge the efforts of the following members of the
KPMG International Standards Group, who were the principal authors of and
main contributors to this publication: Suzanne Arnold, Mikiko Asai Erkiletlian,
Stacy Brown, Jessica Cheong, Irina Ipatova, Julia LaPointe, Brian O’Donovan and
Anthony Voigt.
We are grateful for the assistance of Meredith Canady of the Department of
Professional Practice of KPMG LLP in the US.
We would also like to thank the following, who contributed their time for exhaustive
and challenging reviews of this edition.
KPMG Global IFRS Revenue Recognition and Provisions Topic Team

Brian K Allen
Valerie Boissou
Eric Damotte
Lise du Randt
Yoshi Hasegawa
Yusuf Hassan
Kim Heng
Ramon Jubels
Prabhakar Kalavacherla (PK)
Reinhard Klemmer
David Littleford
Allison McManus
Brian O’Donovan
Emmanuel Paret
Timo Pütz
Anne Schurbohm
Mikhail Stepanov
home.kpmg/ifrs
Publication name: Revenue – IFRS 15 handbook
Publication number: 135964
Publication date: June 2019
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
KPMG International Standards Group is part of KPMG IFRG Limited.
KPMG International Cooperative (‘KPMG International’) is a Swiss entity that serves as a coordinating entity for a network of
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Revenue

1 Step 1 – Identify the contract with a customer 3 8 Contract modifications 194

5 Step 5 – Recognise revenue when or as the 12 Disclosure 316

Prabhakar Kalavacherla (PK)

Organisation of the text

(1) (2) (3) (4) (5)

Other recognition and measurement guidance

(7) (8) (9) (10)

Presentation and implementation

(11) (12) (13)

1.1 Criteria to determine whether a contract exists

... collection of ... rights to goods

Example 1 – Assessing the existence of a contract: Sale of real

In an agreement to sell real estate, Seller X assesses the existence of a

Example 2 – Assessing the existence of a contract: No written sales

Shoe Manufacturer S holds products available to ship to customers before the

Example 3 – Collectability threshold: Assessment based on goods

Assessment focuses on enforceability, not form of the contract

Collectability is only a gating question

Collectability is assessed based on the amount that the entity

Judgement is required to differentiate between a collectability

Collectability threshold may be assessed using information

Collectability is reassessed only when there is a significant

Collectability assessment required for contracts with a significant

The assessment of collectability in Step 1 of the model applies equally to

Fiscal funding clauses may affect the assessment of whether a

When the customer in a contract is a government, there may be a fiscal funding

Enforceable rights and obligations for an expired contract when

In some cases, an entity may continue to deliver services to a customer under

Free trial period offers

Success-based fee arrangements

Contracting practices may need to be evaluated by customer

Contracting practices with different classes of customers in the same

Two definitions of a contract exist in IFRS

IAS®32.13 The definition of a contract in the revenue standard focuses on legal

1.1.1 Framework agreements

An entity needs to consider whether the pricing of individual purchase orders is

Example 4 – Framework agreement: No specified minimum

Manufacturer X enters into a framework agreement with Customer Z for the

Example 5 – Framework agreement: Specified minimum purchases

Manufacturer X enters into a framework agreement with Customer Z for the

Minimum purchase requirements

Additional steps may be required to create legally enforceable

Generally, the purchase order in combination with the framework agreement

Purchase orders under the same framework agreement may be

Additional application examples

Example 6 – Automotive: Combining nomination letter with

On 1 January, Carmaker F approves Automotive Supplier S’s offer to

Example 7 – Automotive supplier: Contract exists for engineering

On 1 January, Carmaker G approves Automotive Supplier S’s offer to

On 1 April, S completes the E&D activities.

1.2 Contract term

A contract is ‘wholly unperformed’ if both of the following criteria are met:

It appears that an economic incentive to renew a contract is not relevant when

Example 8 – Contract term: Economic incentives

Company X enters into a month-to-month wireless contract with Customer

Example 9 – Contract term: Cancellation without penalty after a

Contractor S enters into a manufacturing contract to produce 50 specialised

Example 10 – Contract term: Cancellable without penalty

Contract term affects many parts of the standard

The determination of the contract term is important because it may affect

Consideration payable on termination can affect assessment of

However, if a contract can be terminated by either party without substantive